inclusive finance and sustainable...

Occasional Speeches of Bangladesh Bank Governor 2009 - 2013

INCLUSIVE FINANCEAND SUSTAINABLE

DEVELOPMENT

Atiur Rahman

At the crossroads where economics and ethics meet there stands Bangladesh Bank Governor Atiur Rahman, a development economist who thinks like a philosopher. A prolific speaker and writer, Dr. Rahman in an overwhelmingly impressive flow of speeches, books, articles and essays over 30 years has done much to humanizing the discipline to expound his ideas and thoughts on inclusive growth. Ever since Dr. Rahman has assumed the office of the governor of Bangladesh Bank, the central bank of the country, his every step to rejuvenate, restructure, and revitalize the bank speaks of his conviction to improve the society we live in. In the past four years as the governor of the central bank he has taken the central bank out of the confines of traditional central banking to developmental and humanist path.

His inclusive banking policy that initiated, among other things, 10 taka bank account for peasants is a testimony of his love and compassion for his countrymen. He learned about poverty and his compassion for his countrymen grew from his close contacts with peasants of rural Bengal in his growing years. That is when he saw at first hand the miserable condition in which the majority of his countrymen live. Not surprisingly, he believes that economic theory must keep its feet on the ground.

His hero has always been Rabindranath Tagore: not the Tagore who is only a romantic poet, but the humanist who devoted his life to social reforms. Inspired by Tagore, he drives his reform agenda at the helm of central bank with passion and poignancy.

The current book brings together Governor Rahman’s speeches and talks at different forums in the past four years ranging from financial inclusion, SME financing, women’s entrepreneurship development to corporate social responsibility, infrastructure financing, automation of the banking system to world financial crisis and global business challenges.

Taken together, these speeches and talks form a uniquely rich commentary on current Bangladesh economy, analyses it in global context and spell a vision for a better Bangladesh.

This book is a treasure-chest for economists, for those who are associated with macro-economic management, practicing bankers, and researchers. Governor Rahman has presented his ideas and arguments in a clear, crisp and stimulating style. This collection will surely be a priority reading for all those who are interested in the human face of development.

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Price : BDT-1000, US-20$

BIBM

www.bangladesh-bank.orgwww.bibm.org.bd

‘This superb anthology, featuring speeches and talks of Bangladesh central bank governor and a brilliant development economist Atiur Rahman, discusses key issues of sustainable development, sheds light on how financial inclusion promotes inclusive growth and combats poverty by unlocking advancement opportunities for the disadvantaged poor. Given at different local and international forums between 2009 and 2013, these speeches and talks also cover economic and financial issues and concerns as diverse as developing medium and long term credit market for SMEs to rural credit policy to ethics in banking to Tagore’s thoughts on rural credit and development. Though diverse in range and scope, these speeches and talks are woven together in a common thread called Bangladesh and her dreams for a better tomorrow.’

Khondkar Ibrahim Khaled, Former Deputy Governor of Bangladesh Bank.


INCLUSIVE FINANCEAND SUSTAINABLE

DEVELOPMENT

Atiur Rahman

ATIUR RAHMAN is a renowned development economist and champion of inclusive growth. His efforts to humanizing the discipline have been widely appreciated. Since assuming the office of the governor of the central bank of Bangladesh in 2009, he has taken the central bank out of the confines of traditional central banking to developmental and humanist path. He has taught Development Studies at the University of Dhaka and was a senior research fellow at Bangladesh Institute of Development Studies. His Peasants and Classes published by the Oxford University Press is an internationally acclaimed reference book in development research. He has published extensively on issues of inclusive growth and sustainable development

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Edited byToufic Ahmad Choudhury, PhDandZiaul Karim

Bangladesh Institute of Bank Management

INCLUSIVE FINANCEAND SUSTAINABLEDEVELOPMENT

Atiur Rahman

First Published 2013by Bangladesh Institute of Bank ManagementPlot No. 4, Main Road No. 1 (South), Section -2Mirpur, Dhaka-1216.

©2013 Bangladesh Institute of Bank Management

Typeset in Calibri, Aller Light & ITC Zapf Dingbats

All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Published by Director GeneralBangladesh Institute of Bank Management

Cover by Muhammad Khairuzzaman

Inner bySaikat Roy and Sharif Mollah

Printed byFaith Print, 126 Arambag, Motijheel, Dhaka

Price : Tk. 1,000.00 USD- 20

ISBN : 978-984-33-7994-8

Soft copy of the book is also available atwww.bangladesh-bank.orgwww.bibm.org.bd

For all former and current central bankers in Bangladesh

Contents

Acknowledgements xvPreface xvii

PART ONE : Central Banking, Monetary, Fiscal and Foreign Exchange Policies

1. Challenges to Central Banking in the Context of the Financial Crisis 032. Rethinking Central Banking 073. Growth, Inflation and Monetary Challenges for Bangladesh in FY2011 094. The Making of the National Budget 125. Bangladesh Economy 206. Monetary Policy, Sovereign Debt and Financial Stability: The New Trilemma 257. Macro-prudential and Monetary Policies in SAARC Region 278. Redefining Central Banking 309. External Financing for Growth 32

PART TWO : Prudential Regulation, Supervision, Capital Adequacy, Risk Management, Corporate Governance, Money Laundering and Financial Stability

1. Bangladesh Banking Sector : Vision for the Future 372. Enterprise Risk Management 403. Ethics in Banking 424. Implementation of Capital Adequacy and Risk Management 455. Decade of Loan Syndications 486. Assessment of Corporate Governance in Bangladesh 517. Ethics in Banking 53

Inclusive Finance and Sustainable Development | vii

8. Better Supervision and Better Banking in a Post-Crisis Era 559. Corporate Governance 5710. Global Experience on Economic Regulation 5911. Financial Stability and Risk Management in the Banking Sector 6212. Bank Supervision 6613. Ethics in Banking 7114. Bank Supervision 7315. Bankers' Meeting 7816. Financial Stability Report 2011 8017. Effective Banking Supervision 8318. Combating Terror Financing 8619. Asset Recovery Initiatives 8820. Implementing the Provisions of UNSCR 9021. Financial Mapping Tool for Policy Decisions 93

PART THREE : Financial Inclusion, Mobile Banking, Sharecropping, Agriculture and SME Lending

1. Annual Agricultural/Rural Credit Policy 972. Financial Inclusion as a tool for Combating Poverty- the Bangladesh Approach 1013. Economics of Integrating Access to Finance and Access to Information: Bangladesh Perspective 1054. Promoting Financial Inclusion for Poverty Reduction with Inclusive Growth 1075. Mobile Phone Based Remittance Service 1166. Financial Inclusion: The Next Chapter 1187. Tagore's Thoughts on Rural Credit and Development 1208. Alternative Sources of Finance for Small and Medium Enterprises 1309. Mobile Banking 13210. SME Technology 13411. SME Market Segmentation Database 13612. Role of Central Banks in Financial Inclusion 13813. Access to Finance and Technology Upgradation for SMEs: Bangladesh Perspective 14014. Mobile Banking 14315. Developing Medium and Long term Credit Market for SMEs 14516. Enabling Environment for Integration of SMEs in Global Value Chains 147

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17. Agricultural & Rural Credit Policy and Programme 14918. AFI's transition to independence 15319. Financial Inclusion 15520. Mutually-Supportive Relationship Between Financial Inclusion and Financial Stability 15921. Accelerating Sustainable Development 16722. Financial Inclusion Leads to Financial Stability 17023. SME financing Challenges and Policy Solutions 17524. Pushing SME Initiatives Forward 17825. Optimizing Impact through Synergizing Financial Inclusion 18026. Fostering Mobile Phone Banking 18427. Bringing Efficiency in to Agriculture 186

PART FOUR : Microfinance and Non-bank Financial Institutions

1. Microfinance Pricing Transparency 1912. Microfinance Regulations: Who benefits? 1943. Microfinance Regulations for Development - Global Experiences 1974. Microfinance for Poverty Alleviation: What's Right and What's Wrong? 1995. Asset Accumulation and Poverty Dynamics in Rural Bangladesh 2036. State of the Microfinance Sector: Bangladesh 2011 2067. Microfinance in Bangladesh: Challenges and Future Directions 2098. Islamic Microfinance:An instrument for Poverty Alleviation 2119. Towards a Public Policy on Microfinance in Bangladesh 21410. Micro-finance in Bangladesh: Poverty Impacts and Future Directions 21711. Disaster Risk Reduction Products and Strategies for Microfinance Sector in Bangladesh 22112. Microcredit Operations in Bangladesh: An Effective Way in Reducing Poverty 22313. Regulation and Supervision of Microfinance Institutions (MFIs)

in SAARC Region 22714. Micro, Small & Medium Enterprise 23115. Microfinance and Development 23216. Are Microcredit Participants in Bangladesh Trapped in Poverty and

Debt? 235

PART FIVE : CSR and Green Banking Issues

1. CSR Evening: Meeting Social Goals 2412. CSR Priorities 2443. Prospects, Constraints and Solutions of Renewable Energy

in Bangladesh 2464. Public Private Partnership and Corporate Social Responsibility

for Social Development 2495. Environmental Risk Management Guidelines 2556. Environmental Risk Management Guidelines for Banks

and Financial Institutions 2577. Business Opportunities to Develop Energy Efficient Brick Kilns in Bangladesh 2608. Making sense of CSR: Connecting to Disability in Development 2639. NOBODOY for renewable energy 26510. Climate Change and Banking Sector of Bangladesh 26711. CSR for Banks and Financial Institutions 27012. Sustainable Energy Financing: Bangladesh Perspective 27213. Green Banking and Sustainable Development: the Case of Bangladesh 27514. Business Opportunities in Green Financing 27815. Financing of bio gas plants 29116. Promoting Social Responsibility 29317. CSR Support in Disaster Risk Management 29518. Promoting Environmentally Sustainable Green Financing 29719. Promoting Green Finance Initiaties 299

PART SIX : Digital Bangladesh and IT in Banks

1. CIB Online Credit Bureau Project 3032. Vision 2021: Challenges for Engineering Profession 3043. Financial Services and New Technologies: Looking ahead to 2020 3104. New Business Opportunities after Opening of Digital Payments 3125. Foreign Remittance Payment : Partnership between Banks, MFIs

and IT Platforms 3146. New Era in Banking 3157. E-payment gateway 3188. E-Payments in Bangladesh: Opportunities and Challenges 3209. E-banking and Mobile Commerce 322

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10. Bangladesh Bank online CIB Services 32411. Enterprise ICT Security 32612. Online Payment Gateway 32813. IT Security and Global Banking 33014. Banking and Mobile Commerce 33215. Bangladesh Automated Clearing House 33516. Role of IT in Banking Services 33817. Problem and Prospecs of apps Development in Bangladesh 340

PART SEVEN : Bangladesh Economy

1. Present Economic Outlook and Challenges Facing Bangladesh Economy 345

2. Strengthening Remittance Flows and Impact: Policies, Practice and Prospects 348

3. Extreme Poverty Eradication Day 3514. Macroeconomic Policy, Poverty Reduction and Inclusive Development 3545. Operationalising pro-poor Growth: Research-Policy Links 3606. Bangladesh India Co-operation in Economic Development and Poverty Reduction 3627. Sovereign Credit Ratings 3658. Bangladesh Bank in a Year since May 2009 3669. Mobilization of national resources 38010. APG Typologies Workshop 2010 38311. Enhancing Economic Resilience Sustainability and Inclusive Growth 38512. Bangladesh 2030: Strategy for Growth 38813 Challenging the Injustice of Poverty 39114. Issues of Current Concern in Interest Rate, Liquidity, and Capital Market

Recovery 39315. Modeling and Forecasting for Inflation Targeting 39516. Feasibility Study of PPP Projects 39717. Project Identification and Feasibility Study 39818. Commodity Price Volatility and Economic Diversification 39919. Diaspora Bond for Mobilizing Foreign Savings 40320. Financial Development and Inclusive Growth in Bangladesh 40521. PPP for Rapid Economic Growth 40722. Bangladesh at 40: Changes and Challenges 40923. Beyond Inflation Targets 411

24. An Alternative Financial System for Inclusive Growth and Sustainable Development 414

25. Current Economic Situation of Bangladesh 41726. Fifty Years of Banking in Bangladesh-Vision 2021 42227. Islami Interbank Fund Market 42628. Promoting Pro-poor Growth: Success of the Present Government 42829. Building Inclusive Green Economies: A New Development

Partnership? 43230. Foreign Investment in Bangladesh 43531. Towards Bangladesh at 50 43832. Sustainable Production and Consumption of Energy Resources 44333. Mechanization of Agriculture in Bangladesh 44534. Bangladesh: Recent Macroeconomic Trends & Prospects 44735. Green Financing for Sustainable Development 466

PART EIGHT : Global Economic Issues

1. Asian Clearing Union 4712. The Role of Monetary, Fiscal and External Debt Policies 4743. Global Banking: Paradigm Shift 4774. Global Financial Recession 4835. Ensuring Food Security: the Role of SAARC Central Banks 4866. Global Financial Meltdown and International Trade Finance 4897. Vision of Integration and Development in South Asia -some key

issues and considerations 4928. World Financial Crisis and Global Business Challenges 4949. Global Economic Crisis: Impact and Policy Responses 49810. SAARC Payment Cooperation 50111. Developing Supply Chains in South Asian Textile and Clothing Industry 50312. Youth Employement Opportunities: Some Issues 50513. Bangladesh Economy: Post Global Crisis 50714. Emerging Economic Outlook and Policy Challenges for

South Asian Economies 51015. Challenges and Opportunities of the Changing Global Economy: Way Forward for Bangladesh 51316. Global Financial Crisis and the Strengths of Islamic Banking System 51617. Towards an inclusive growth in South Asia:

Role of Regional Cooperation 517

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Inclusive Finance and Sustainable Development | xiii

18. Global Economic Turmoil and the Outlook for South and South-West Asia 520

19. Creating More and Better Jobs in South Asia 52220. World Marketing Summit 2012 52621. Overview of Recent Ecnomic Trends in Bangladesh 52922. Socio-economic Development Goals 53223. Vulnerabilities of Developing Asia Pacific 53624. MDG attainment and Post-2015 Development Agenda Setting

in South Asia 53825. International Trade Fraud: Detection & Prevention 54026. Boosting Sub-Regional Development 54227. Socially Responsible Financing for Enhancing Economic and Financial

Stability 54528. Adopting Global Development Goals 552

PART NINE : Other Economic and Social Issues

1. Partnering For Leather Sector Development 557

2. Investment Confidence in Bangladesh 560

3. The Bangladesh Household Remittance Survey 2009 562

4. Skill Development Program on Personal Leadership 564

5. Overcoming the Challenges in Financing Power Sector in Bangladesh 566

6. SEAF Bangladesh Ventures 570

7. Investment Promotion and Financing Facility 572

8. Investment Plans in Agriculture, Food Security and Nutrition 574

9. Improving Remittance Infrastructure 576

10. Deposit Insurance 578

11. Entrepreneurship and Development: Experiences, Practices and Policies 580

12. Remittances for Community Development 582

13. Social Protection in Bangladesh 585

14. Eradicating Extreme Poverty: Whose Responsibility Is It? 587

15. Challenges and Prospect of PPP Project Development 589

16. Transforming the Lives of the Poor? 590

17. Fostering Biotechnology Research 592

18. Objectivity and Positivism in Economic and Financial Reporting 594

19. Challenges and Dynamics of Socilal Accountability 596

20. Safe Working Environment for RMG Sector 599

21. Developing Islamic Finance in Bangladesh 605

22. Strengthening Trade Linkages with NRBs 607

23. NRBs: Our National Heroes 609

24. Promoting Inclusive Socio-economic Development 612

25. Fostering Innovation and Creativity in Business. 614

26. Diversification of the Export Basket 616

27. Develop Knowledge on Quantitative Research 618

28. Renewable Energy for Sustainable Economic Progress 619

29. Integrating Bangladesh with the Global Markets 621

30. Japan: A Consistent Development Partner 623

31. Private Sector Development 625

32. Improving Corporate Governance 627

33. Financial Reporting Standards and Practices 628

34. Developing Social Accounting Matrix for Bangladesh 630

35. Creating Opportunities for IT students 632

36. Improving Financial Reporting Standards 634

37. Acceptence Speech of Indira Gandhi Gold Plaque 636

38. Exporters establishing Credential for Bangladesh 638

39. Instilling of Socially Responsible Business Ethos 640

40. Coins Portray Cultural Heritage 642

41. Recognizing Excellence in Export 643

Index 645

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Acknowledgements

The evolution of this book owes a great debt to a group of inspiring people at the governor’s secretariat of Bangladesh Bank and scholars at BIBM. They have contributed generously to the development of the manuscript: AFM Asaduzzaman and Dr. Md. Habibur Rahman of the bank gave valuable advice on many points and the book would not have been what it is without their support. They have shown resources of patience and perseverance that have been a lesson in perfectibility. The enthusiastic involvement of both Nurun Nahar and Arif Hasan of the governor’s secretariat in the mammoth task of preparing the manuscript for this publication was admirable.

A great debt is owed to a number of directors at BIBM who have been very much involved in the making of this book as it now stands: Ahsan Habib for reading the manuscript with great attention to each detail; Prashanta for his critical input, advice and the benefit of his close reading; Mohiuddin Siddique for providing insightful and constructive critiques.

Last but certainly not the least, we are deeply indebted to Abed Ali of BIBM for helping us prepare the manuscript for publication with efficiency and understanding. An intellectual companion throughout the project, his advice has been invaluable.

Preface

At the crossroads where economics and ethics meet there stands Atiur Rahman, a development economist who thinks like a philosopher. A prolific speaker and writer, Governor Rahman in an overwhelmingly impressive flow of speeches, books, articles and essays over 30 years has done much to humanizing the discipline to expound his ideas and thoughts on inclusive growth. Ever since Governor Rahman has assumed the office of the governor of Bangladesh Bank, the central bank of the country, his every step to rejuvenate, restructure, and revitalize the bank speaks of his conviction to improve the society we live in. In the past four years as the governor of the central bank he has taken the central bank out of the confines of traditional central banking to developmental and humanist path.

His inclusive banking policy that initiated, among other things, 10 taka bank account for peasants is a testimony of his love and compassion for his countrymen. He learned about poverty and his compassion for his countrymen grew from his close contacts with peasants of rural Bengal in his growing years. That is when he saw at first hand the miserable condition in which the majority of his countrymen live. Not surprisingly, he believes that economic theory must keep its feet on the ground.

His hero has always been Rabindranath Tagore: not the Tagore who is only a romantic poet, but the humanist who devoted his life to social reforms. Inspired by Tagore, he drives his reform agenda at the helm of central bank with passion and poignancy.

The current book brings together Governor Rahman’s speeches and talks at different forums in the past four years ranging from financial inclusion, SME financing, women’s entrepreneurship development to corporate social responsibility, infrastructure financing, automation of the banking system to global financial crises and business challenges. Taken together, these speeches form a uniquely rich commentary on current Bangladesh economy, put it in global context and spell a vision for a better Bangladesh. The objective of compiling the present compendium of speeches of Governor Rahman is to offer the reader a picture of the evolving nature of policies and strategies of the central bank to meet emerging needs of the economy and the society.

Inclusive Finance and Sustainable Development | xvii

The vision of “inclusive finance” is to significantly increase outreach to un-served and under-served households and enterprises. Supported by a sound policy, legal and regulatory framework, a country should have a continuum of financial institutions that collectively offer appropriate products and services to all segments of the population at an affordable cost. Through the introduction of no-frill accounts at a nominal cost for farmers, unemployed youth, the hardcore poor, the freedom fighters and the beneficiaries under social security programs by the state-owned commercial and specialized banks, Bangladesh Bank has operationalized the concept.

Financing of small and medium-scale enterprises (SME) – constituting nearly 95 per cent of our industrial sector – is currently considered as one of the major pro-poor socio-economic development policy of the Government. Being labor-intensive with short gestation period, SMEs are capable of increasing national income as well as rapid employment generation and thus achieve the goal of eradicating extreme poverty and promote women empowerment. Bangladesh Bank has designed a comprehensive policy and program on SME financing, backed by liberal refinance facilities, which include setting up indicative targets for the banks, cluster development policy, area approach method, priority to small and women entrepreneurs and speedy loan sanction and disbursement. Under these refinance facilities, 22 banks and 24 non-bank financial institutions have entered into agreement with the Bangladesh bank. All these activities are intensively monitored by a dedicated department in the Bangladesh Bank – the SME and Special Programs Department.

For mainstreaming women in economic activities, the Bank has adopted a number of policy initiatives which include allocation of 15 per cent of BB refinance fund for women entrepreneurs and charging a reduced rate of 10 per cent for loans under this scheme. Banks have also been allowed to sanction loan up to Taka 2.5 million without collateral and under personal guarantee if the borrower is a women entrepreneur or if 51 per cent shareholders are women in an enterprise.

Green banking aims at using resources with responsibility to the society so that the environment is not polluted. Banks can play a significant role in this area by refusing to finance potentially harmful corporate activities. Bangladesh Bank took a proactive role by formulating the Green Banking Policy and Strategy Framework and an Environmental Risk Management Guideline in close consultation with the financing institutions. BB has introduced a refinance scheme worth Taka two billion to help the banks finance loans for Effluent Treatment Plants, solar panels, bio-gas plants and Hybrid Hoffman Kiln technology in the brick-making industry at a low interest rate of 5 per cent.

Corporate Social Responsibility (CSR) is a concept of self-regulation widely applied by businesses all over the world, especially the developing countries. By the end of December 2011, all the banks had accepted CSR as one of their mainstream activities. CSR activities are spread across such areas as, humanitarian and disaster relief, education, health, sports, culture, and the environment. In terms of expenditure, the banks had spent nearly 2.18 billion Taka in 2011, compared to a measly 0.41 billion Taka in 2008. BB has also

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established a “Customers’ Interest Protection Center” at its head office as well as in the branches to redress the grievances of bank customers.

Physical infrastructures like power, telecommunication, ports, bridges, highways etc. are critical in accelerating economic growth and alleviating poverty. But developing infrastructure requires huge and lumpy investment, characterized by long gestation periods. Since the Government’s budgetary resources are increasingly found to be inadequate and the flow of foreign aid is on the decline, a viable alternative is to involve the private sector in these activities in a syndicated arrangement. The Government has also published a framework for Public-Private Partnership (PPP), envisioning its strategy and policies in this area. It has also set up two companies – Infrastructure Development Company Ltd. and Investment Promotion and Financing Facility – to provide direct financial support to PPP projects.

With the opening of the on-line credit information by the Bangladesh Bank on 19 July 2011, BB entered the digital age. Banks and financial institutions can now furnish credit information to BB 24/7 round the year and can also access credit reports from CIB on-line. All the departments of BB headquarters and the branches are now connected through LAN/WAN. Highly secure data center and data recovery site ensures real-time replication. Electronic Reporting System has also been introduced to remove the hassles faced by the banks. The Bank has also introduced e-recruitment and e-tendering system for its procurements. E-library service is also offered to all staff members of the Bank to access library resources. BB has discontinued hardcopy circulation of internal orders/circulars which are now loaded directly on the intranet. All these activities indicate BB’s total commitment to digitalization of the banking system to expedite operational activities and minimize risk.

This omnibus is a treasure-chest for economists, for those who are associated with macroeconomic management, practicing bankers, and researchers. Governor Rahman has presented his ideas and arguments in a clear, crisp and stimulating style. This collection will surely be a priority reading for all those who are interested in the human face of development.

This expectation is what has led us at BIBM to put the speeches within the covers of a single volume. We are grateful to Governor Rahman for his gracious consent to anthologize the speeches in the current format. Thanks are due to Mr. Ziaul Karim who has read the entire manuscript with astute and affectionate attention to each detail. The book would not have been what it is without his input.

Toufic Ahmad Choudhury, PhDDirector General

BIBM

Inclusive Finance and Sustainable Development | xix

PART ONECentral Banking, Monetary, Fiscal

andForeign Exchange Policies

Inclusive Finance and Sustainable Development | 3

Challenges to Central Banking in the Context of the Financial Crisis*

Let me begin with a brief recount of how Bangladesh fared on the recent global financial crisis. Our financial sector remained virtually unruffled by the global crisis mainly because of regulated limited openness of Bangladesh to short-term capital flows. A small net FPI outflow (USD 159 million in FY 09) was far outweighed by sustained strong inflow of remittances from workers abroad, in part presumably transfers of their savings from jittery markets in host countries. Competitiveness of our apparels and textiles sector kept overall FY 09 export growth in double digits, despite export decline in other commodities. Import of capital goods for new investment activities weakened in the recessionary global environment however, and food grain imports remained low with good domestic harvests. Low outflows for imports from the surging inflows of workers' remittances and export proceeds kept the local financial markets awash with liquidity, in sharp contrast with most markets elsewhere facing liquidity crunch caused by large scale flight of FPI and non-resident deposits.

Bangladesh Bank guided the financial sector in utilizing the liquidity glut in productive pursuits (lending in agriculture, SMEs, renewable energy and effluent treatment projects etc., sectors typically under-served by markets) that strengthen domestic demand by increasing employment and income. Export sectors affected by weak demand were extended fiscal support (modest subsidies, tax/fee waivers etc.) from the government, which also increased social safety-net expenditure for the weak and vulnerable population segments. Bangladesh Bank allowed temporary easing of bank loan rescheduling terms for affected exporters, besides allowing easy credit conditions to continue with supportive monetary policies. With 5.9 percent real GDP growth in FY 09 following 6.2 percent growth of FY 08, growth of Bangladesh economy has consequently been impacted only modestly by the crisis. Current trends of economic activities indicate that real GDP growth is likely to be around six percent in FY 10, accelerating in subsequent years as export demand recovery gains firm traction. CPI inflation remains moderate (annual average 5.21

*First International Research Conference- 2010 on 'Challenges to Central Banking in the Context of the Financial Crisis', organized by Reserve Bank of India during 12-13 February 2010 in Mumbai, India

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percent as of November 09), and is projected not to exceed 6.5 percent by June 2010. Over the medium term, Bangladesh is aiming at rapid poverty eradication with sustained strong and inclusive economic and social growth.

Let's move to the issue of challenges to central banking in the context of the financial crisis.

(i) Exchange rate policies and reserve accumulations: Export led large accumulations of foreign exchange reserves, aided by, to some extent of undervaluation of domestic currency, have for some years now been viewed as desirable buffers against regional or global instability. The global financial crisis has laid bare the limitations and costs of this approach. Undervalued currency attracts footloose speculative inflows (FPI, short term non-resident deposits) faster than can be absorbed in real sector investments; these inflows pile up in host country's foreign exchange reserves (fetching low returns in central bank's risk averse placements abroad) while the domestic currency equivalents of these inflows fuel price pressures in local asset markets. In hours of crisis, these free funds exit quickly, leaving local markets in credit crunch and drawing down the reserves. Another effect of excessive reserve buildup is the heightened risk of fragility of central bank balance sheets, with huge exposures in the few reserve currencies, in some cases with exposures even in equity and commodity positions.

It may be appropriate, therefore, not to actively pursue continual reserve buildup once it attains a reasonably comfortable level, from then on avoiding deliberate undervaluation of domestic currency. Any incremental price pressure from domestic demand stimulated by this approach is likely to be offset by elimination of price pressures from currency undervaluation. Also, suitably channeling part of the current large reserve stocks to investments in regional bond issues financing real sector investments projects will be beneficial, with reserve resources supporting real output rather than ending up in speculative uses.

(ii) Management of capital flows: Over the past several years, persistent global imbalances have impaired orderliness of global capital flows, creating arbitrage opportunities for speculative capital movements. For advanced economies open in external capital account, avoidance of destabilizing capital inflow/outflow surges will be contingent on the expected reforms in global monetary order with adequate safeguards (including measures like the suggested 'Tobin Tax' on capital flows) against buildups of large imbalances. Pending global dialogs and their outcomes, spontaneous policy discipline in individual large economies aiming at balanced external positions will help progress greatly.

For countries like Bangladesh that are maintaining capital controls, opening up will be cautiously gradual. As of now, inflows and outflows of non-resident owned direct and portfolio investments are free of restrictions in Bangladesh, but short-term Taka money and Treasury bill markets are not open to non-residents. Outflows of resident owned capital for investment abroad are restricted; and apart from usual trade credit, residents can borrow abroad only for industrial projects, for medium or longer terms.


Because of such cautious stance, Bangladesh had bop current account surplus even at the height of the global financial crisis. Gradual further consolidation of external sector strength will hopefully enable phased easing of the capital controls. Opening up of short term Taka money market to non-residents will help develop forward exchange market, but this may need to be accompanied by some sort of counter cyclical taxation on FPI and other short term capital flows to discourage sudden destabilizing surges.

External borrowing by resident owned businesses will be eased gradually with gains in the country's debt sustainability and credit rating. Investment outflows of resident owned capital will be opened up in the final phase, as domestic financial institutions and markets acquire strength and expertise to absorb and withstand the strains of large capital flows. Other developing economies will also presumably adopt broadly similar gradual approach in opening up to global capital flows.

(iii) Future of the global reserve system: USD and Euro are now the two major reserve currencies, a few other fully convertible currencies are also in limited use. Laxities originating from the persistent US imbalances that culminated in the recent global financial crisis have called into question the dominant role of USD as a reserve currency. Emerging imbalances in some EU member economies, unless sorted out, will eventually pose risk for overall external balance of the EU, with implications for reserve currency role of Euro.

In theory, a fully convertible currency of any economy maintaining external sector balance qualifies as reserve currency. In practice, speculators exploiting global imbalances render it potentially destabilizing for smaller economies to have ballooning buildups of non-resident balances in their currencies. For stability, the global reserve system needs a handful (perhaps around four to six) of fully convertible currencies of fairly large individual economies /regional monetary unions in the discipline of a global order effectively maintaining imbalances at a minimum. Currencies of the larger fast growing emerging market economies like China, India and Brazil have potential for reserve currency role over the medium term. Currencies of new regional monetary unions would have been preferable given the typically stronger commitment of Monetary Unions to bring balance and stability; but these can only be longer-term prospects. It takes several years of sustained patient co-operation and integration to bring a successful monetary union into fruition.

For the global reserve system to function well it will need to be underpinned by a reformed global monetary order effective in maintaining balance and stability. This would need some mechanism tethering growth in global liquidity to the growth in real global output. A possible option mooted in Bangladesh sees a reformed IMF in a new role as the apex global monetary agency, annually issuing (or recalling) SDR allocations in line with actual or potential growth in global output; with liquidity issues in national or regional currencies by members needing to be fully backed by IMF SDR allocations, a mechanism in likeness of gold standard, with global output growth substituting for gold.


Numerous small developing economies like Bangladesh presently have little or no voice in global dialogues on issues affecting them, even though in aggregate they represent a substantial segment of the global population. Ensuring their meaningful, substantive representation in global dialogues needs to be seen as a priority.

(iv)Reforms in the IMF: Current basic quota (voting power) allocations in IMF are legacies of past dominance of North America and Europe; these need revision to reflect current realities. Here again, the reallocations for smaller developing economies need to take into account the significant percentage of global population they represent, beside their current minor shares in global economic output.

Under its current mandate the IMF has not succeeded in preventing buildups of large global imbalances from actions of its major quota holder members. The mandate for IMF in a new global monetary order will need to have adequate safeguards against laxities of members leading to persistent large global imbalances.

(v) The potential for developing regional monetary arrangements: Successful regional monetary unions require high level regional political and economic cooperation and integration attainable only by years of sustained, patient work. The European monetary union realized this way is an inspiring example for everyone including us. Here in South Asia we are already operating a limited clearing union for trade settlements. Two monetary unions are operating in East and West Africa. Political will for developing new regional monetary arrangements will strengthen with beneficial results from cooperation and integration initiatives in trade, tariff and other policies preparatory to eventual monetary union. The reform agenda for IMF and the global monetary order may include discussions and analytical work on how best to support and promote regional efforts and initiatives towards regional monetary unions. A well-functioning regional monetary union is likely to better ensure global co-operation and stability than numerous individual economies of various sizes acting individually.


Rethinking Central Banking*

Post-crisis initiatives on thought / reforms of central banking have focused on financial stability, particularly on regulations, found deficient in preventing and coping with the crisis; including, inter alia, risk appraisal and containment; capital adequacy and liquidity; principal-agent relationship issues including executive compensation, cross-border coordination in supervision of globally active large financial institutions. The ongoing revisions and refinements in macro-prudential regulations and related policy tools will hopefully lead to stronger, more resilient financial institutions and markets and supervision regimes better able to anticipate and withstand shocks from occasional destabilizing events in the real or financial economy. Smaller less advanced economies like Bangladesh have little scope of playing role in the global consultation processes; but with limited size and external exposure of their financial sectors they can opt for slower, more gradual implementation of regulatory changes, in which support and help from more advanced central banks and global forums are of course welcome.

The regulatory reform initiatives will hopefully be effective in strengthening resilience of financial institutions and markets in coping with future instabilities; but it is unclear whether enough is being done towards preventing the underlying macro-economic imbalances that cause the instabilities. The recent global financial crisis was rooted in successive decades of cumulating global imbalances originating from spillovers of lax macro-economic policies in some large economies; the international reserve role of their domestic currencies permitting them to run prolonged spells of external account deficits, causing global liquidity expansion well in excess of growth in real global output of goods and services. The global community of central banks needs to spearhead the necessary preventive initiatives with appropriate reforms in the global monetary order; with effective deterrents against buildup of global imbalances from adverse spillovers of lax, unbalanced domestic policies in the larger economies. The IMF in its current mandate has not been effective or particularly active in preventing buildups of global imbalances from actions of its dominant quota holder members. In the run up to the recent global financial

*IMF/ECB/FRB High Level Conference, USA, on October 10, 2010.


crisis, no time series data on overall trends of global liquidity growth vis-à-vis growth trends in real global output were available in IMF publications, an apparent unconcern about consequences of the global imbalances.

For a reformed monetary order to maintain global balance and stability effectively, it will need some mechanism tethering global liquidity expansion with growth rate of real global output. One option will be a reformed IMF mandated as the apex global monetary agency, issuing (or withdrawing) SDR allocations in line with actual or potential expansion (or contraction) in global output; with liquidity issues in national or regional currencies ofmembers needing to be fully backed by SDR allocations. The mechanism will be in likeness of the erstwhile gold standard, with real global output growth substituting for gold. The current basic quota (voting power) allocations in IMF are legacies of past dominance of North America and Europe; these need revision to reflect current realities, with reallocations for smaller developing economies taking into account the size of global population percentage they represent, beside their current minuscule shares in global output.

Besides attention to monetary and financial system stability, central banking needs also to promote fuller financial inclusion of all economic activities and all economic sectors, towards supporting global real output growth. Dereliction of traditional central banking orthodoxy in this direction has perpetuated market gaps and market failures in financial services (even in the developed economies), with forgone opportunities and sub-optimal global performance in growth of output, income and welfare; slowing down eradication of global poverty. It is opportune time now for the central banking community to redress the neglect of promotional role; effectiveness in this role will aid rather than hinder the stability preserving regulatory role.

As the central bank of a low income developing country, Bangladesh Bank has of late been paying increased attention to fuller and deeper financial inclusion, with a view to redressing market failures and unleashing blocked advancement opportunities for the under-served / excluded economic sectors and population segments, promoting more inclusive economic and social growth. The attention to growth promoting potentials of financial inclusion is, of course, not at the expense of usual concerns and market based policy frameworks for monetary and financial stability. The approach is a pragmatic, heterodox blend aiming at optimizing growth while maintaining and bolstering stability.


*CPD Dialogue on Growth, Inflation and Monetary Challenges for Bangladesh in FY2011 at CIRDAP Auditorium, 13 February 2011.

Growth, Inflation and Monetary Challenges for

Bangladesh in FY2011*

Our economy is now on the threshold of a higher growth path as envisioned in the country's medium and perspective plans, on course for 6.7 percent real GDP growth in FY11, and well above seven percent in FY12. For the economy to power ahead at fast pace without major hiccup or instability we will need to see to it that activities in the real and financial sectors proceed in sync and not discordantly. In the past two years, we saw investment momentum in our real sector slackening, mainly due to weakened demand for our exports to traditional Western markets in downturn triggered by the global financial crisis. This investment slowdown side by side with above-trend growth in remittances from workers abroad kept our financial sector awash with liquidity; much of it flowing into the already overheated capital and real estate markets, in quest of high returns. You are all well aware of the consequences of mad race of these markets. Following the recent sharp stock market downturn we did our utmost, alongside other authorities, in helping stabilize the market; at times even in temporary deviation from the course dictated by our core monetary policy objectives.

Such short term stabilizing interventions after a crisis precipitates will however do little in averting repetition of crisis episodes in future, unless we address also the root cause underlying the tendency of the market towards overvaluation; viz., the chronic shortage of new capital issues to meet growing demands of intending investors. The Govt. is apparently fully aware of this problem and has responded positively and earnestly. The needed long term remedy lies not mainly with the government or the regulators, but with the multitude of successful real sector entrepreneurs who are yet to opt for going public and issuing capital in stock markets instead of relying solely on own equity and bank borrowing for business expansion. It is of course well known that capital issues have a tax disadvantage vis-à-vis borrowing in that interest expense on borrowing is tax deductible while dividend payments on equity are not. Towards establishing a more level playing field, forums of the entrepreneur community and think tanks can work together in drawing up a cogently argued


case for more favorable tax treatment of dividend expense on equity issues; sector regulators may then consider advocating to the government in favor of appropriate tax regime reform involved. I am sure that the probe committee now reviewing what went wrong into the capital market will also be in a strategic position to suggest some more of long-term policy guidelines for better management of the capital market.

Over the coming days, we are likely to see some easing of the high demand pressure for capital market assets, now that real sector investments have paced up with rebound in export demand; and with government's stimulus packages and BB's financial inclusion drive shoring up output activities responding to robust domestic demand. Inflationary pressure from rising global prices of food and non-food commodities remains a concern, but this should stabilize before long as higher prices elicit higher supply response. What is more heartening is that the agriculture sector has been responding pretty rationally to price rise of its products. The government too has been providing necessary fiscal support to this sector. The banking sector as well has been extending support to it in innovative ways. Increase in fiscal cost of subsidizing essential staple food grains for low income groups can at least in part be offset by lower need of input subsidies for farmers as they get better market prices for their outputs. It is high time now to attend to the longer term reform issue mentioned above, for safeguarding sustained balance and stability of the economy in a high growth path, averting future recurrence of crisis episodes. BB will as ever stand in readiness to work with other regulatory bodies in charting a safe course for our financial sector, in consultation with stakeholder forums. As you have indicated, BB's monetary policy is not only focused on curbing excessive inflation but is indeed more concerned with growth and structural change. You must have noted that BB is vigilant on asset price movements not only for stability of the real economy, but also for stemming the build-up of inflationary expectations.

Monetary policy is a blunt tool in addressing more volatile food or fuel price inflation. Moreover, it cannot alone rein in inflation unless complemented by other policy interventions. Simultaneously, one must remember that today's inflation is both a regional and global phenomenon. So, one needs to be pragmatic and accommodative. Of course, BB is concerned about inflation but more so on 'core' inflation rather than on 'headline' inflation. Like us, you too are aware that the prices of some items fluctuate widely from month to month; others have a lot of inertia and hence affect inflation.

Therefore, it is ones with inertia that the central banks need to worry about more, because inflation gets built in to these prices and it is hard to get rid of this. In this context, we have put more emphasis on supporting the productive sector. However, we will continue to gather information from all possible sources to keep an eye on what is happening to inflation. Supply side response will also be regularly monitored and supported.

For example, the prices of potato, onion, ginger, turmeric, fish, dal masur, mustard oil, salt etc. either reduced or remain unchanged over the month of January mainly because of supply side support from the government and financial institutions. This kind of supply side support will be continued.

However, stabilisation of prices of basic food and other essentials (fuel, primary healthcare and education) should be done by public provisioning or targeted fiscal subsidies so that the poor have access to these basic essentials. And government has been exactly doing this at the moment.

To sustain fiscal budget, emphasis should be given on raising government revenues through progressive taxation measures.

Government should seriously consider imposing taxes on asset holdings like upper class property and luxury cars, and on harmful commodities like tobacco and alcoholic liquor. It should also impose levies on shopping in big shopping malls in metropolitan centres where majority of shoppers are well-to-do people. Indeed, the tax should really be extended right up to the growing local growth-centres.

This will not only boost government revenue, but also together with public provisioning of basic services, will address the issue of rising income inequality.


*Views expressed on 'National Budget Making: Bottom up Approach and Inclusiveness', April 2011, Dhaka, Bangladesh.

The Making of the National Budget*

National Budget of a country is the annual program of the Government's expenditure and income for a fiscal year. In a developing economy like Bangladesh, the annual national budget reflect the government's development philosophy, priorities and approaches towards equity and social justice. The role of the public sector to provide infrastructure and basic public goods is to create an enabling environment for the private sector to act as the engine of economic growth through the national budget. As the national budget formulated annually may undermine the economic stability and growth prospect in the medium term, it seems to be myopic. Medium Term Budgetary Framework (MTBF) is an effective measure for redressing the problems emanating from the short time limit of the annual budget. The framework of MTBF must be inclusive and bottom up to reach Bangladesh in a trajectory of high-performing quality growth with prices of commodities stabilized, income and human poverty brought to a minimum, health and education for all secured and capacity building combined with creativity enhanced, social justice established, interpersonal and regional income disparity reduced, and a capacity to tackle the adverse effects of climate change achieved as envisioned in the Government's Outline Perspective Plan (2010-2021).

Budget Making Process in Bangladesh

The Finance Division of the Ministry of Finance (MoF) has the overall responsibility to prepare both the revenue and development budgets. The Secretary of Finance is in-charge of preparing the annual budget. The Revenue Budget wing is responsible for finalizing the revenue budget encompassing all the stages from collation and examination of ministerial submissions, summarization and passage through the parliament to the final publication. The Development budget Wing converts the ADP, prepared by the Planning Commission, into the Development Budget.

The budgetary procedure may be functionally divided into four phases: executive preparation and submission; legislative review and enactment; executive implementation; and expenditure control and auditing. Throughout these phases, the MoF performs the central coordinating role and remains


exclusively responsible for the preparation of the budget. Various ministries and divisions are also involved in the entire process.

The administrative units where expenditures take place send their expenditure estimates to the MoF through their controlling authority. These estimates consist of revised estimates for the current year and the budget estimates for the forthcoming year. These initial estimates are formulated on the basis of trends in the actual expenditure of the first quarter of the ongoing financial year, i.e. July-September.

After receiving the estimates from the controlling officers, the Budget Wing of the Finance Division scrutinizes their completeness. Any proposed expenditure must be approved by the concerned authority in accordance with the existing delegation of powers.

After scrutiny, the MoF sends the estimates to the controlling authority of each agency asking for adjustments and revisions with a brief explanation for those suggested measures. Budget meetings are held during March-April between the MoF and the agencies, where the latter are allowed to discuss their needs with the Ministry. Taking into account the actual expenditures of the past six months and other relevant factors, estimates are finalized. The MoF prepares its Demand for Grants on the basis of these final estimates. Simultaneously, the Minister of Finance consults other stakeholders including economists, Members of the Parliaments, various professional groups to gather innovative ideas on desired policy interventions. Some of these new ideas get reflected in the budget speech as well.

Recurrent and Development Expenditure

We see in the trends of recurrent and development expenditure in different sectors (Graph 1). To achieve the broad-based pro-poor and inclusive growth, major allocations go to the Social Security and Welfare and Education and Information Technology. Interest payments on domestic and external debt also comprise a significant part of recurrent expenditure.

Graph 1

2010-11

0

As

% o

f Tot

al B

udge

t

5

10

15

20

2009-10

2008-09

SocialSecurity

andWelfare

Educationand

InformationTechnology

Intersest Transportand

Communication

Local Gov.and Rural

Development

Energyand

Power

Health Agriculture Defence PublicAdministration

Public Orderand Sercurity


Recurrent and Development Budget: Source of Income

Revenue mobilization must be strengthened to limit budget deficits at reasonable levels. There is no doubt that our revenue GDP and Tax-GDP ratios are the lowest in the region. However, our efforts at revenue mobilization have been gaining momentum in recent days. Sources of income in recurrent and development budget are shown in graph 2.

Graph 2

Details of Development Expenditure

In the trends of allocations in different sectors of development budget (Graph 3) it is seen that to attain the medium term growth target, allocations in energy and power, education and information technology, social security and welfare and in LGRD have been increased.

Graph 3

2010-11

2009-10

2008-09

0

20

40

60

As

% o

f Tot

al B

udge

t

TaxRevenue

(NBR)

ForeignGrants

ForeignLoan

DomesticFinancing

Non-TaxRevenue

Tax Revenue(Non-NBR)

2010-11

0

As

% o

f Tot

al B

udge

t

10

20

30

2009-10

2008-09

HealthEducationand

InformationTechnology

Agriculture Transportand

Communication

PublicAdministration

Local Gov.and Rural

Development

Social Securityand

Welfare

Energyand

Power


Budget Deficit and Budget Deficit Financing

The strong impediment to meet the resource requirements in the public sector is our revenue-GDP ratio, which currently stands at around 12 percent. In addition, the tax structure does not have a pro-poor bias: the bulk of the revenue is still generated by indirect taxes, mostly value added tax, at local and customer levels.The contribution of direct taxes is only about 28 percent whereas the target is to raise the contribution of direct taxes to the total tax revenue to at least 40 percent in 2021 making the tax-structure more pro-poor. The strategies like broadening of the tax base, raising both direct and indirect taxes with appropriate rationalization and reforms, strengthening the professional and technical capacity of the revenue administration to monitor potential tax payers and countering tax evasion. A strengthened and effective service network to tax payers is a must to raise tax compliance and deepening the organizational and other reforms of revenue collecting organizations to transform them into quality institutions to meet the revenue needs, service requirement of tax payers, and facilitation of productive activities aspired in the Outline Perspective Plan of Bangladesh (2010-2021): Making Vision 2021 a reality.

Revenue mobilization must be strengthened to limit the budget deficits at reasonable levels. As indicated earlier, despite recent surge in revenue collection, our Revenue-GDP and Tax-GDP ratios are the lowest in the region. Excess government borrowing from the banking sector risks crowding out of private sector. All of our domestic borrowing is at market rates which why the interest cost on government debt is on rising trend. Bangladesh, being an LDC, is eligible for concessional financing from external development partners. Accessing these sources may help proper debt sustainability and keep interest payment lower. However, the external support trend, which is already surging in the pipeline should first be released by improving our both negotiating skills and implementation capabilities. Graph 4, 5, 6, 7 depict the budget deficit, budget deficit financing, debt sustainability, and domestic borrowing respectively.

Graph 4 Graph 6


Budget Deficit (Excl. Grants)Domestic Borrowing

Borrowing from the Banking System

Non-bank Borrowing

As

% o

f G

DP

As

% o

f G

DP

FY11(Estim

ated)

FY11(Estim

ated)

FY10 (Revised)

FY10 (Revised)

FY09 (Actual)

FY09 (Actual)

FY08 (Actual)

FY08 (Actual)

6

5

4

3

2

1

0

4

3.5

3

2.5

2

1.5

1

0.5

0

Domestic BorrowingExternal Borrowing

Graph 5 Graph 7

Medium Term Budgetary Framework (MTBF)

With a view to improving the efficiency and effectiveness of public expenditure and attaining the goals set out in the strategic documents, government launched MTBF since FY 2005-06. FY 2010-11 Budget prepared within the three year context of MTBF with the direct involvement of 33 line ministries /divisions was destined to establish the alignment between the government's strategic objectives, policy priorities and public spending allocations which were guided by the government's key priorities for sustainable development with a view to achieving the Millennium Development Goals and the aims of "Vision 2021". Government is hopeful to bring all of the line ministries/divisions in the FY 2011-12 Budget under the extended MTBF to five years from existing three years for making it consistent with the Sixth Five Year Plan.

Bottom up Approach and Inclusive Budget

In the bottom up approach, the socially excluded groups get prioritized access. The poor people get more involvement in the national budget if we can specify the social safety net spending for them with direct payment instead of through middle-men by electronic system. The national budget should be proposed with targeting more of the subsistence facilities to the poor and middle class as the richer class can afford the private facilities. The poorer class is the loser in almost every case even when they produce something, as they don't get the higher price in the first hand. Although in the current budget including the development budget, the social safety net spending is around thirty percent it can be increased ensuring the targeted payment and service to the poorer class who actually deserve the priority.

Through the bottom up approach the national budget can enhance the inclusion of the poor who mainly depend on wage-labour for survival and are excluded for their inability to participate fully in social and economic activities and in decision-making. This social exclusion denies them the consumption of essential goods and services like healthcare and they are highly vulnerable to any shock, such as natural disasters, death, or disability of an income-earner. A


Total Revenue

Total Expenditre

Budget Deficit (Exc. Grants)

Total Debt DomesticDebt External DebtA

s %

of

GD

P

As

% o

f G

DP

FY11 (Estimated)FY10 (Revised)FY09 (Actual)

FY11(Estim

ated)

FY10 (Revised)

FY09 (Actual)

FY08 (Actual)

181614121086420

50

45

40

35

30

25

20

15

10

5

0

health insurance smart card could have enhanced their capacity to cope with this perpetual erosion of income due to this health disaster.

The capacity and efficiency of existing public universities should be strengthened to serve all instead of establishment of more such institutions. Mere establishment of more physical infrastructures without caring for efficiency is indeed a drain on our hard earned public resources. The richer class is already enjoying the private university facilities and they can also get further access to the public universities given the quality of education their sons and daughters receive. The freedom fighters may have better privilege in the efficiency and capacity strengthened public hospitals. Here also more establishments will incur more inefficiency, and corruption.

Priority Sectors in the Budget

As per the Medium Term Budgetary Framework (MTBF) 2010-11 to 2012-13, public spending framework during FY11 to FY13 to be driven by the requirement to meet MDGs, which was designed giving priority of investment in the energy and power sector to overcome the power shortages. To achieve the broad-based pro-poor and inclusive growth major allocations are also prioritized to go to the social security and welfare, education and information technology. As desired in the MTBF 2010-11 to 2012-13 priority in health sector has been linked to the measures to improve the efficiency and effectiveness of spending on government health services.

National Budget: 2010-11

The Government of the, Peoples Republic of Bangladesh has introduced a Medium Term Budget Framework (MTBF) since 2005-06 moving away from traditional budget formulation in order to improve the efficiency and effectiveness of public expenditure. The FY 2010-11 budget has been prepared within the three year context of MTBF paying utmost importance on the fulfillment of election commitments as portrayed in the government's strategy-'Vision 2021". The sources along with their shares of resources in the National Budget: 2010-11 are depicted in Graph 8 and where the resources are designed to be used are depicted in Graph 9.The details of Development Expenditure of the National Budget: 2010-11 and monthly ADP allocations over time are portrayed in Graph 10 and 11 respectively.

Graph 8 Graph 9


Non-Development and Development Budget: 2010-11(Taka 1321.70 Billion), Resources Coming From

Development Budget:2010-11 (Taka 96.94 Billion), Details of Development Expenditure

Educationand

InformationTechnology,

12.8%

Others, 5.2%Health, 8.7%

Energy andPower15.3%Social

Security andWelfare,

5.3%

Local Gov.and Rural

Development,

21.8%

Agriculture,8.9%

Transportand

Communication,

14.2%Public

Administration,

7.8%

ForeignGrants,

3.6% TaxRevenue

(NBR),54.9%

Tax Revenue (NBR):Taka 725.90 Billion (54.9%)

VAT 37.3%Import Duty 15.0%Income Tax 28.9%Supply Duty 17.7%Others 1.0%

ForeignLoan, 8.2%

DomesticFinancing,

17.9%

Non-TaxRevenue,

12.7%Tax

Revenue(Non-NBR),

2.6%

Graph 10 Graph 11

Latest Development of National Budget: 2010-11

Tax revenue collections by NBR during July-January of FY 2010-11 grew by a healthy 28.4 percent with 18.2 percent growth in the non-NBR component (which is only about 4.32 percent of collected NBR tax revenues in this period). Non-tax revenue receipts representing income surpluses of SOEs reportedly declined 1.8 percent during this period, mainly due to FY10 profit fall of BB and low revenue earnings of BTRC. Profits of BB are expected to recover substantially in FY11. It is expected that non-tax revenue will increase in FY 2011-12 because of the increase of 2G license renewable fees of mobile operators. Overall, government's revenue receipts look well set to attain the 16.8 percent growth target set in the budget for FY 11.

The 42 percent of annual 'non ADP' or 'revenue' expenditure allocation reportedly utilized in first seven months of FY 2010-11 remained roughly on target. On the other hand only 33 percent of ADP allocations was reportedly utilized during this period (FY 11) indicating continuing sluggishness in ADP implementation, which was 39 percent at the same time of previous year.

Role of Members of Parliament in National Budget

Outreach by parliamentarians to civil society and other groups is a very powerful tool that can be used to enhance parliament's role in the bottom-up budget process. Nothing can strengthen parliament more than enhancing the representation of its constituents. In addition to parliamentarians' working individually at the constituency level they can hold public hearings and regularly keep a finger on the pulse of the feelings of the electorate. Parliamentarians now only approve the budget. They can also monitor and audit the budget. They can also raise questions about the pace of implementation of the budgeted projects/programs. Parliamentarians should be provided sufficient resources including adequate research support to play an effective role in the budget cycle, to hold public hearings, to play a proactive role at the


Non-Development and Development Budget:2010-11

(Taka 1321.70 Billion),Use of Resourcess

Monthwise comparison of ADP Data(Billion Taka)

MiscellaneousExpenditure,

3.9%Education and

InformationTechnology,

13.9%

Interest,11.1%

Housing, 1.0%Transport andCommunicati

on 6.7%Local Gov.and Rural

Development8.2%

Energy andPower, 4.6%

SocialSecurity and

Welfare, 7.3%

Public Orderand Security

5.2%

100908070605040302010

0

2007-08 2008-09

2010-112009-10

PublicAdministratio

n,14.2%

June

May

April

March

February

January

Decem

ber

Novem

ber

October

September

August

July

Recreation,Culture and

ReligiousAffairs, 1.2%

Defence, 6.9%Industrial and

EconomicServices,0.9%

Agriculture,8.6%

Health, 6.2%

Sectorwise Resources Distribution (Including Subsidies and Pension)

constituency level and to help build national consensus around budget issues. Parliamentary committees can also organise public hearings to solicit inputs for budget across the country both before and after the budget is drawn up, and in this way they can help provide public input into the budget process.

After weathering the global financial crisis and economic slowdown without losing footing on growth path, Bangladesh economy is now well poised to embark on a higher growth trajectory aspired for in the medium term Perspective Plan. We do believe that in this land of immense potentiality, the earnest endeavours of our policy makers with a view to implementation of national budget with proper mobilization and utilization of required resources will never be futile to lead us to our aspired destination. Any attempt at making the budget decentralized, participatory and accountable will go a long way in fulfilling this cherished goal.


*Adam Smith Seminar 2011 in Schloss Spiez, Switzerland during 28-29 June 2011.

Bangladesh Economy*

The steady and stable growth performance of Bangladesh over the years amid repeated episodes of natural calamities and external shocks has provided markets and entrepreneurs a predictable policy environment of low uncertainty. Following a couple of years in global crisis related mild slowdown, economic activities have rebounded in FY 11 with strong (above 40 percent) growth in both exports and imports. Provisional BBS estimate reports 6.7 percent real GDP growth for FY 11 (July 10-June11), following 5.7 & 6.1 percent respectively in FY 09 & FY 10. The severe power supply shortages impeding output activities eased significantly in FY 11, enabling utilization of idle installed capacities. Benign climate and timely support measures yielded good growth in agricultural output. Given the palpable pace in growth momentum, the final estimate for FY 11 real GDP growth may touch 7.0 percent; and the growth rate is projected to rise to 8.0 percent pa by FY15. Growth path of per capita GNI estimated at USD 818 for FY 11) is on course to reach the middle income country group threshold (USD 996) by FY 15 or earlier.

Bangladesh has consistently pursued a cautious, prudent stance in monetary and fiscal policies, with fiscal deficits below four percent of GDP in recent years. The government's modest revenue base (in GDP percentage) is widening steadily with ongoing reforms in revenue administration; rising to 12.1 in FY11 from 11.5 of FY10. The country's medium term macroeconomic framework targets this to reach 14.6 percent by FY 15.

Bangladesh economy was not impacted severely by the recent global financial crisis and economic downturn, owing to its limited, regulated external exposure. While being a WTO member since its inception with open trade regime and full current account convertibility of Taka, Bangladesh maintains some capital account controls to protect the relatively small economy from destabilizing surges of footloose international capital flows. Bangladesh permits unrestricted inflows and outflows of non-resident owned direct or portfolio investments and earnings thereon; but restricts investment abroad by residents, as also short term fund inflows and outflows other than normal trade


credit. This policy regime kept banks and financial institutions in Bangladesh free of toxic assets and contagion from external markets in the global crisis, safeguarding their solvency and liquidity. Crisis related downturn in mature advanced economies brought in some lagged effects however, in brief spell of export and import slowdown and attendant mild decline in GDP growth. During this spell, the government extended support to the affected export sectors and enhanced social safety net expenditure to uphold domestic demand. Recovery phase in growth followed shortly, external trade has accelerated sharply in FY 11 with both exports and imports growing by over 40 percent y-o-y, total external trade in FY 11 will exceed USD 50 billion. Apparels exports have bounced back strongly, low labor costs retaining competitive edge even after the recent wage hike. In the post-crisis surge, exports to new markets in fast growing Asian economies and exports of newer items like marine vessels and IT enabled services are gaining momentum. Domestic demand also remains robust, with spiking rural real wages signaling tightness of rural labor markets. Extensive self-employment lending by microfinance institutions and SME financing flows promoted by BB's financial inclusion campaign are visibly transforming economic life in rural regions. Near self-sufficiency in food grain output (domestic rice production meets 96 percent of local needs) cushions the economy against stresses from global shortages and price spikes.

According to WB and WTO rankings, Bangladesh in 2010 had 21st position in GDP growth rate, 7th position in remittance receipt, 70th and 68th positions respectively in export and import volume. Growth potential of Bangladesh has earned recognition in several global surveys; like 'one of the frontier five markets' (JP Morgan Chase), 'in next 11 emerging markets after BRICS' (Goldman Sachs), '7th among top 10 global online outsourcing destinations' (Christian Science Monitor). Moody's and S&P have rated Bangladesh BB- & Ba3 respectively with stable outlook both in 2010 and 2011 in their sovereign credit rating reports.

Social and human development indicators of Bangladesh are also improving steadily. The percentage of total population living in poverty (upper poverty line, 2122 kcal daily food intake) has declined from 57 in the late nineteen nineties to 31.5 in 2009; and Bangladesh is on course for attaining most of the MDGs by or before 2015. Recently Bangladesh received UN award for impressive progress in reducing infant mortality, and for being among top ten performers in gender equality, already attaining it in primary school enrolment. As recently pointed out by Nobel Laureate economist Amartya Sen, progress of Bangladesh in social development indicators is on many counts superior to those of her higher income neighbors. Between 1980 and 2010, HDI has improved 81.1 percent in Bangladesh, against 62.2, 57.6 and 28.3 percent respectively in India, Pakistan and Sri Lanka. Fertility rate in Bangladesh is 2.3, against 2.7 in India. The proportion of underweight children in percent of total child population is 41.3 in Bangladesh, against 43.5 in India. Female literacy rate is higher in Bangladesh than in India. Infant mortality and under 5 mortality per thousand live births are respectively 41 and 52 in Bangladesh, against 50 and 66 in India. The superior social development performance of Bangladesh is underpinned by inclusiveness as a keystone of her development strategy, intended to unleash creative energies of the entire population by opening up


blocked advancement opportunities for the poor. Annual national budgets routinely allocate substantial pro-poor public expenditure for health, education, food security and social safety net; towards fuller social inclusion and empowerment of the excluded and the vulnerable. Bangladesh Bank's financial inclusion campaign is supporting the pursuit of inclusive growth with its financial inclusion campaign, broadening financial sector's reach-out to the excluded population segments and underserved productive sectors like SMEs including small landholder/sharecropper farming.

Monetary policy and FY11 CPI trends

Propped by buoyant global commodity prices and robust domestic demand, CPI inflation has remained above the targeted 7.5 percent annual average level throughout FY11 (8.7 percent in May 2011), with its food price component at double digit level from December 10 onward. Point-to-point food CPI inflation came down to 13.2 percent in May from 14.4 percent of April with local harvest of new boro rice crop arriving in the market; but the non-food (core) CPI inflation has risen at the same time to 4.8 percent from 4.0 percent, due to increases in subsidized user prices of energy. Headline p-to-p CPI inflation has eased slightly in May 2011 to 10.2 percent from 10.7 percent of April, and may just make touchdown to single digit level by end-June (close of FY 11). Domestic monetary policies of small economies like Bangladesh have limited leverage on domestic inflation; much depends on trends of prices of imports from global markets, which are influenced by spillover effects of domestic macroeconomic policies of larger economies. Bangladesh Bank (BB) remains proactive in using the monetary policy tools at hand to limit demand pressures in domestic markets from excessive monetary growth. Cash reserve requirement for banks were enhanced in both FY 10 and FY 11, and BB's policy interest rates (repo, reverse repo) were enhanced thrice in FY 11. The rather sudden sharp acceleration in investment and output activities in FY 11 following a spell in relative slowdown placed the domestic financial markets under substantial liquidity strain. BB had to engage substantially with the markets on a day to day basis injecting Taka and USD liquidity to meet part of the growing demand while allowing interest rate hike and exchange rate depreciation to curb the remainder. BB guidance for local financial markets in managing surges of financing needs of real sector entrepreneurs include advice for helping and encouraging entrepreneurs in accessing equity and term borrowing from abroad for part of their investment needs (for which the prevailing policy regime is very congenial), and also for requiring established well run businesses to go public and issue equity/debt in the local capital market to raise funds instead of depending solely on bank loans. BB's credit policies discourage lending for unproductive non-essential purposes while promoting and supporting lending for productive pursuits that generate output, employment and income.

As central bank of a developing country, BB uses its monetary and credit policy tools in an integrated way, seeking to maintain optimal balance in growth-inflation tradeoff. Positive outcome of this approach has shown up in GDP growth gain, with core (non-food) inflation remaining at lower single digits. Domestic prices of food and fuel commodities (which happen to be large


components of headline CPI inflation) follow trends of their import prices (Bangladesh government subsidizes user prices of fuels, and some agricultural inputs to cushion shocks from up trends in global prices; this is already a big fiscal burden). We expect the current round of policy measures in larger economies (viz., monetary tightening in China and India, fiscal austerity in Europe, end of quantitative easing in US) to have some cooling off effect on global commodity prices, helping bring CPI inflation in Bangladesh down to single digit levels by the second half of 2011 (H1 FY 12). The FY 12 national budget projects annual average CPI inflation easing down to 7.5 percent, from the current level above 8.5 percent.

It would be relevant here to recall some pretty straightforward global disciplines that could keep global commodity price volatility and global inflation in check but are being overlooked or avoided under influence of big vested interests. Firstly, the prevailing volatility in futures prices in global commodity markets have far more to do with speculation by quarters that are neither producers, processors or users than with supposed price discovery by actual producers, users and other bonafide stakeholders in the supply chains. It is a shame to see speculation fuelled price volatility in essential commodities enriching speculators at the expense of impoverishing the consumers or the governments subsidizing their consumption. A simple global discipline debarring banks and financial institutions including hedge funds etc. from position-taking in commodity futures can stop this loathsome practice. Secondly, the recent global financial crisis clearly underscored the need for tethering global financial sector growth to growth trends in global real sector output to avoid recurrence of destabilization from buildups and collapses of financial sector bubbles. Rounds of dialogues in forums such as the G-20 thus far have had little if anything to show for in progress towards the needed new reformed global monetary order.

Outlook for growth and investment

Bangladesh's Perspective Plan for the period up to FY 20 envisages transition from the low income country group to the middle income group by 2020, in terms of GNI per capita. Beyond this, we are looking forward to crossing the upper middle income country group threshold by 2030, on course to maturity by 2050 as a prosperous advanced economy and one of the leading growth drivers in Asia. A recent Citigroup global report sees Bangladesh sustaining an annual average 7.5 percent real growth rate through decades up to 2050, enabled inter alia by her favorable demographics. This projection of growth pace is consistent with our own longer term vision for Bangladesh in 2050; and beckons the country as a very promising investment destination for both local and foreign entrepreneurs with global aspirations.

Factors that endow Bangladesh with the bright medium and longer term outlook for growth and investment include:

- Favorable demographics with vast population in the younger working age groups, with diverse range of education, skills and training. The government's inclusive approach to growth and development will continually unleash and mobilize creative energies of all segments of the


population, nurturing innovation.

- Decades of pioneering engagement in self employment micro-credit, and the financial inclusion campaign in support of inclusive growth has generated a broad and still expanding base of entrepreneurship, an important factor bolstering sustainability of growth.

- Globally competitive local wages will protect competitive edge of Bangladesh in labor intensive manufacture over the medium run. For the longer run, innovative entrepreneurship nurtured by high investments in manpower development and in research facilities developing new products and processes will accumulate competitiveness gains in new high value added outputs faster than the eventual erosion of competitiveness in traditional low value added output; hopefully allowing Bangladesh to avoid the so called 'middle income trap.'

- Besides a broad base of publicly funded education and training, the private sector in Bangladesh is playing a major role in education and training of manpower, from basic to advanced tertiary levels. This makes Bangladesh a promising venue for offshore campuses of globally renowned universities, and also as venue for new product and process research and development centers of globally active manufacturers. One Western automobile manufacturer is reported to be already using an automobile interior design facility installed here; Samsung, a giant East Asian conglomerate is reportedly installing facilities in Bangladesh for design and development of their electronic gadgets.

- A very congenial policy regime for FDI and FPI, allows restriction free repatriation of profits/dividends as well as disinvestment proceeds including capital gains. FDI in non-financial enterprises have no upper limit on extent of foreign ownership, and can be partly or wholly foreign owned.

- Favored market access for exports from Bangladesh (as a low income developing economy) to many advanced and fast growing emerging market economies; making Bangladesh an attractive FDI destination as offshore production base for exports to these markets.

- Growth and development efforts steadily opening up newer investment opportunities in infrastructure, manufacturing and services. Challenges from climate change threats are creating new investment opportunities in renewable energy and in new environmentally benign output processes and practices in agriculture and manufacturing.

To sum up, Bangladesh has positioned herself in the global community as a forward looking nation with firm footprint on a path of steady, accelerating growth and development. Bangladesh welcomes partnership and active participation of the global community in her growth and development pursuits on mutually beneficial terms and committed to contributing what she can towards advancement of global goals at the same time drawing support from the global community for its own progress.


Monetary Policy, Sovereign Debt and Financial Stability: The New Trilemma*

While developed economies are in the throes of social discontent from inequalities bred by greed driven excesses of market capitalism, a further challenge looms up rather suddenly, in the form of severe strain on financial stability from sovereign debts mounting to unsustainable levels. The available strategies of monetary policy is likely to buy time but at the cost of risking another episode of imbalance and financial instability in days ahead. With matters as they now are, it looks as though the global economy is fated to remain bound in cycles of instability triggered alternately by financial, fiscal and monetary imbalances, aptly termed as the new trilemma by sponsors of this conference. With remedial steps against one imbalance sowing seeds of another, the picture is unsettling rather than reassuring.

There is a new trilemma for central banks in advanced economies. In recent years, lax monetary policies in many of these economies led to excessive leverage and speculative excesses eroding financial stability; fiscal bailouts to restore financial stability raised sovereign debt burdens to unsustainable heights, endangering financial stability again by steeply eroding the worth of large stocks of sovereign debt held by financial institutions. This in turn has forced monetary policies to continue on lax stance to avert immediate slippage into economic slump, at cost of risking repetition of the monetary-financial-fiscal instability cycle.

Separation of roles for monetary policy, financial stability and debt management should not still be seen as the best practice given the chain of inter-linkages mentioned above. Macro-economic policy managers in governments and central banks working together in co-ordination, with medium and longer term goals in view would be seen as the new best practice.Sustainable sovereign debt is attainable without much of any direct role for central banks, by curbing and stabilization of public expenditure as necessary, followed by devising ways of expanding the tax base in tandem with growth in public provision of goods and services. Nordic European states are success


*Conference organized by Reserve Bank of India held on February 1-2, 2012 at Hotel Taj Mahal Palace, Mumbai.

examples of persuading electorates to pay high taxes in return for high quality public goods and services. Although attaining and maintaining sovereign debt sustainability is the onus of the governments, central banks have supportive role to play, maintaining the correct stance of monetary policies.

Appropriate central bank response to persistent fiscal dominance will vary according to specific country situations, but in all cases they need to be unrelenting in strong advocacy for fiscal restraint; insisting on stabilization of public debt and growth of tax bases in tandem with expansion of public expenditure, so as not to let sovereign borrowing levels strain financial stability. Also, central banks should maintain real interest rates at such levels to dissuade borrowing binge by public and private sectors. To this end, imposition of levies on inflows of unduly cheap external capital inflows may also be needed occasionally. Besides these steps in terms of traditional role in the private profit driven market economy framework, promotion of pursuit of socially responsible business ethos (evolving both in developed and developing economies under diverse rubrics like Corporate Social Responsibility, Value Driven business, Ethical business and so forth) would help consolidate stability by curbing debt addiction and short term speculative profit seeking at the expense of long term sustainability in the real and financial sectors. It is time now for central bank research initiatives to engage more in these newer paths towards enduring financial stability with debt sustainability in both public and private sectors.

Central banks do not possess sufficient or effective instruments to impose fiscal revenue and expenditure discipline, which is the onus of the governments. Global co-ordination of macroeconomic policies to prevent negative external spillovers from persistent imbalances in larger economies is also the subject for governments rather than central banks. Thus the issue of stability rests with governments, central banks are not well-equipped to take up explicit mandates for maintaining financial stability.

By prolonging (and even further loosening) persistently loose monetary stance to avert economic slump in crises posing immediate threats to their financial institutions and markets, central banks of many advanced economies have sown seeds of future instability, compromising medium and longer term inflation goals, national and global. It is not straightforward to figure out how far the goals have been compromised, but it should be possible to limit the negative consequences with careful management and co-ordination of macro-economic policies in years ahead, individually and collectively.


*Macro-prudential and Monetary Policies in SAARC Regionat a SAARCFINANCE Roundtable on May 16, 2012 in Pokhara, Nepal.

Macro-prudential and Monetary Policies in SAARC Region*

One major change in global financial regulatory and supervisory scene in the aftermath of the global financial crisis is the considerably heightened concern for financial stability. Freer capital flows have in the latter half of twentieth century drawn financial markets across national borders into increasingly closer integration. While hugely enhancing investment volumes and efficiency, this has also hugely escalated systemic risks of institutional collapse and market freeze-ups within and across national borders, by contagion from each other's weaknesses and vulnerabilities.

Besides well known micro-environment vulnerabilities from institutional weaknesses in internal governance and risk management, globally integrated financial markets and institutions are now also increasingly vulnerable to adverse macro-environment arising from monetary and fiscal imbalances in their own countries or in major open economies that they have linkages with. In recent years we are seeing crises from micro and macro imbalances feeding upon each other. The global financial crisis arose in 2008-2009 from excessive buildup of poor quality household debt and opaque derivatives in asset portfolios of financial institutions; caused mainly by surfeit of liquidity from prolonged monetary laxity in some large economies, notably the US. Massive fiscal bailouts by governments to rescue their stricken financial sectors have now swelled public debt levels to crisis proportions in many European countries; once again threatening stability of their financial sectors. The global financial system is therefore in urgent need of near and longer term measures steering it away from the vicious circle of recurring instability.

Global forums of financial sector regulators and supervisors, including the BIS Basel based Financial Stability Board mandated by the G-20 global forum of developed and developing economies, have responded fairly fast, putting forward recommendations for near and longer term revamp of macro-prudential measures; inter alia sharpening quantitative risk focus , specifying quality specification on required capital, and introducing liquidity requirement specifications in the new Basel III capital regime. Periodical stress testing of


banks and financial institutions for timely identification of vulnerabilities is now in widespread practice. Liaison and cooperation between home and host country authorities for effective cross border supervision of large systemically important banks is being emphasized. Feasibility of curbing emergence of large 'too big to fail' entities that entail high systemic risks, inter alia by requiring separation of systemically important retail banking from speculative investment banking, is being mooted upon in many advanced economies. Basel-based global supervisory forums have brought up guidelines for better linking executive compensation in banks and financial institutions with longer term institutional performance, to curb pursuit of quick gains from high risk speculative investments. In the US, regulatory measures limiting engagement of financial institutions in commodity and asset price speculation (Volcker Rules) are coming into effect.

Macro-prudential reforms in our SAARC region are proceeding along lines of these global developments; in phased manner best suited to the stage of financial market development in each country. In Bangladesh, banks are now in Basel II capital regime, with new Basel III revisions and liquidity requirements in the process of being phased in. Stress testing of banks for identifying their vulnerabilities is already in routine practice; contingency planning for handling crisis situations is being shored up. Regulatory and supervisory procedures and practices in Bangladesh Bank are under continual review and reform.

It is not clear that the current global regulatory reform initiatives will be enough to dissuade banks and financial institutions from risky speculative behavior that lead to recurrent instability. A fundamental reorientation of their corporate goals and objectives towards conducting business in socially responsible manner is perhaps needed for this. Only such a basic reorientation can perhaps draw them away lastingly from socially harmful unproductive speculative investments towards inclusive financing of productive, pursuits of all population segments in all economic sectors; harnessing and fostering creative energies of the entire working age population. Already growing in sidelines in many developing and developed economies, this socially responsible inclusive financing orientation has been chosen by Bangladesh Bank as the mainstream approach for the financial sector in Bangladesh. Initial results look promising. Our financial sector remained undamaged and resilient during the global financial crisis and subsequent global growth slowdown; actively supporting the domestic sectors affected by the global slowdown; supplementing the government's fiscal efforts to uphold domestic demand.

Over the coming years it would be advisable to continue the trend of phased rather than abrupt full opening up of our financial sectors to the rest of the world, in line with gains in external sector strengths in our respective economies. The SAARFINANCE forum can be a convenient regional consultation and cooperation platform on measures bolstering financial stability and promoting financial development.

As mentioned in the beginning of the preceding section monetary policies are important for both price and financial stability. Unduly low interest rates in lax monetary policy environments create perverse incentives for banks and financial institutions into risky speculative investments in pursuit of higher


returns. On the other hand, high interest rates prevailing in unduly tight monetary regime can stifle real sector investment, hurting growth and employment. Monetary policies need therefore to adopt pragmatic rather than ironbound rule based approach, carefully nuanced to suit the evolving real sector developments.

During the global financial crisis and its attendant global growth slowdown, monetary policies in all South Asian economies understandably adopted accommodative stance to uphold domestic demand and output activities in the backdrop of sagging external demand. The subsequent growth recovery proceeded at varied pace in different countries, necessitating differing monetary policy response to inflationary concerns depending on specific country circumstances. In Bangladesh, investment and output activities remained relatively subdued during FY 09 to -FY 10, due partly to weak external demand and partly to energy supply scarcities; leaving surplus liquidity from surging workers' remittance inflows free to feed into consumer and asset market price pressures (mopping up of liquidity in the situation of subdued economic activity would have further hurt output activities, including in the export sectors facing weak external demand). Investment and output activities paced up sharply in FY 11, with both exports and imports growing by 42 percent. Credit demand surged in the sharp upturn of economic activity. In the environment of high monetary growth consumer price inflation maintained upward trend, crossing beyond the single digit comfort zone in March 2011. Inflation abatement expected from restrictive monetary stance adopted in FY12 kept getting delayed by government's repeated upward revision of subsidized user price of energy; but has started showing up since March 2012. Headline CPI inflation (point to point basis) came down to single digit level (9.9 percent) in April 2012, core (non food, non fuel) CPI inflation is also on downtrend but still in double digits from knock-on effects of energy price hikes. With the prevailing subdued trends in global commodity prices, we expect CPI inflation in Bangladesh to decline further in the coming months.

Government borrowing levels in Bangladesh remain moderate, rarely exceeding four percent of GDP. However, occasional sudden sharp increases in government's borrowing from the banking system create spells of liquidity crunch in the interbank market needing market intervention by central bank. An inter-ministerial Co-ordination Council headed by Finance Minister and with BB Governor as a member meets quarterly to discuss issues of co-ordination of monetary and fiscal policies.

As for financial stability issues, SAARCFINANCE can serve as a useful forum for exchange of ideas and experiences on monetary policies of member countries including such issues as coordination of fiscal and monetary policy stances, and external spillovers from macroeconomic policies of member countries.


*Redefining Central Banking: Financial Stability, Early Intervention and Crisis Preparedness held in Ontario, Canada, 27 June 2012.

Redefining Central Banking*

Financial sector supervision for maintaining financial stability has been a longstanding traditional central banking responsibility, although in the later decades of twentieth century this got shifted to separate authorities in some countries. The global financial crisis of 2008 brought back into focus the interrelated nature of monetary and financial stability and the need for closely coordinated supervision of both. Wherever this separation took place, the central banks have got themselves reengaged in financial stability issues after the global crisis. I see this more as a return back to, rather than as redefinition of traditional central banking.

Bangladesh did not go for separation of monetary and financial sector supervision authority, both rests with Bangladesh Bank (BB), the country's central bank. Our financial sector with its limited, regulated external exposure was virtually unaffected by the global financial crisis, remaining solvent, liquid, and free of contagion from toxic assets.

Safeguarding of financial stability remains nevertheless a priority of our central banking responsibilities. Alongside supporting ongoing market development, we are continually upgrading our financial sector regulatory and supervisory structure, practices and capacities in line with evolving local context and international best practices. Basel II capital regime implementation has strengthened risk focus in financial sector management and supervision; work towards phasing in of the Basel III modifications is in progress. Basel III liquidity coverage requirements are soon to be introduced, following completion of preparatory exercises. Stress testing routines have been introduced as mandatory practice in banks, to identify and address vulnerabilities.

BB's prudential regulations and onsite examination/offsite supervision procedures and practices are also now risk focused, in line with international best practices recommended by Basel Committee (BCBS). Supervisory CAMELS rating exercises and Early Warning Systems at BB maintain vigilance on risk


management, corporate governance and internal control processes and practices in the financial sector. A problem bank unit at BB's Offsite Supervision Department oversees restoration of weak banks to health. BB's supervisory departments are increasingly focusing on consolidated supervision of banks/financial institutions and their subsidiaries, as also on closer contact and information exchange between host country and home country supervisors for effective supervision of banks with branches/subsidiaries across borders. A new Financial Stability Department has been created in BB for focused oversight of systemic stability related issues, taking over from the offsite supervision department tasks like conducting of stress tests and forward looking assessments of banks. Creation of contingency planning and crisis management structures are also underway.

Efficacy of BB's financial sector supervision is evidenced by relative rarity of bank/finance company failure episodes, four in as many decades since independence. In all these cases BB restructured the failing institutions into viable ones without involving any fund of its own and without causing loss for depositors and other creditors. Nonetheless, BB is not complacent and is fully aware of gaps and weaknesses in capacity of coping with existing and upcoming challenges, including impacts of fiscal and other macroeconomic imbalances of domestic and external origin. Accordingly, we are bolstering defenses against financial instability by continual upgrading of BB's capabilities in forward looking supervision. Bringing up teams of our supervisory staff in training events at centers of excellence like this one in Toronto Center is part of these ongoing efforts.

Worthy as the global initiatives of strengthening financial stability focused supervision are, I doubt if these will be enough to avert future recurrence of instability, unless we reorient the ethos and objectives of financial markets and institutions towards socially responsible directions; seeking longer term gains from inclusive financing of all productive initiatives of all population segments instead of looking for quick gains from speculative activities. In absence of this reorientation, even financial sectors in developed advanced economies are failing to respond to financing needs of small businesses including startups of creative, innovative entrepreneurs, creating financial exclusion and prolonging the post global crisis economic slowdown.

At BB we have chosen to take catalyzing role in reorienting our financial sector's goals and ethos in socially and environmentally responsible direction, guiding the sector in mainstreaming CSR in corporate goals and objectives and launching a comprehensive well orchestrated financial inclusion campaign in which banks and financial institutions are participating with spontaneity and enthusiasm. This is meaningfully helping attainment of the inclusive growth and poverty eradication goals of our government's near and longer term national development plans; by upholding healthy output and employment growth in Bangladesh economy even in the backdrop of ongoing global slowdown. I would like see the spread of similar catalytic role of other central banks in promoting socially responsible financing as a true redefining of central banking.



External Financing for Growth*

Nobody disputes the fact that realizing our growth aspirations will require more investment resources than are available as domestic savings, or that both our public and private sectors need adequate access to external financing at affordable costs. Already close to the lower middle income country group per capita GNI threshold, time now for us to set sight on the next milestone of reaching the upper middle income country group threshold by 2030 or earlier.

Mobilizing investment resources for this growth path will require accessing global capital flows by integration of our financial sector with international financial markets. Bangladesh has already embarked on this path, widening external exposure gradually in line with gains in credit standing and external sector viability. Both Moody's and S&P have consistently maintained favorable sovereign rating for Bangladesh with stable outlook for the last four years, to a large extent because of this prudent stance on external exposure.

The keynote paper sees Bangladesh's approach in this regard as 'highly cautious' although also noting the recent more positive BB attitude. We would be well advised to bear in mind that the cautious approach has served us well in making steady, stable economic progress avoiding slippery slopes of debt default and balance of payment crisis from excessive external debt. You all are aware of the many recent and past crisis episodes from excessive external indebtedness, both in developing and developed economies. The gains in external sector viability earned by the cautious policy posture pursued thus far have enabled us to now to step forward to a posture of openness to higher external exposure, but we shall need to continue to remain cautious, closely monitoring the volume and maturity profile of external debt build up both in the public and private sectors to protect debt sustainability.

In the public sector, the government continues to rely mainly on concessional financing from external development partners, with only limited, closely monitored extent of non-concessional commercial borrowing. Availability of concessional financing will however dwindle as Bangladesh joins the middle income country group in the near future, and accessing of international markets for borrowing on commercial terms will need to increase. Hopefully, the current favorable sovereign credit rating of Bangladesh will improve further with

*PRI Workshop on External Financing as Catalyst for Growth 7 July 2013, Ball Room, Westin Hotel Dhaka.


continuing gains in external sector viability and attainment of middle income country status, bringing down the costs of non concessional borrowing.

In the private sector, entrepreneurs are free to attract external equity finance through both FDI and FPI routes. Longer term external borrowings by industrial entrepreneurs require prior approval of a BOI Scrutiny Committee chaired by BB Governor. As chairperson of this Committee I have been personally pushing forward speeding up of approval processes. I am pleased to inform you that the committee has responded positively to my call. This has also helped pull down interest rates in banking sector. Recourse to shorter term trade related external borrowing by private sector businesses has been opened up both for importers (buyer's credits) and exporters (discounting of usance export bills), these are already in extensive use by businesses.

These borrowings take the automatic route pleaded for in the keynote paper, requiring no prior approval as long as the borrowing terms are within the prescribed parameters. Relatively few of our private sector businesses have earned high enough credit standing for issuance of bonds abroad for raising finance. Foreign bond issuance approval requests, if any, from businesses can be handled by the BOI Scrutiny Committee, but these will also need prior approval of the BSEC. There should be no reason why this Committee's composition or modus operandi cannot be revisited in the interest of faster, more efficient disposal of approval requests.

It may be relevant also to recall that with recent waiver of one-year lock-in period on nonresident holdings of Bangladesh government's Taka treasury bonds, foreign institutional investors are coming forward for investment in these bonds. For private sector borrowers in Bangladesh, this will mean decrease in government borrowing from the domestic savings pool, leaving more for the private sector borrowers at lower costs.

Government's own sovereign bond issuance as and when it occurs will establish yield benchmarks facilitating bond issuance by private sector corporate. It is reassuring however that the government has prudently refrained from considering any sovereign bond issuance in a pre-election year when such issuance can be costlier from uncertainties associated with the elections.

Proposals of the keynote paper including modification of debt-equity ratio prescriptions, end use restrictions etc. merit being looked into at depth. Norms now followed in such matters are not immutable holy writs cast in stone, BB and the concerned government authorities remain ready and willing to bring about all possible further facilitation as long as the changes involved do not weaken necessary oversight on whether external debts are being incurred for permissible purposes by creditworthy borrowers, and on the overall buildup of private sector's external debt liabilities.

PART TWOPrudential Regulation, Supervision,

Capital Adequacy, Risk Management,Corporate Governance,

Money Launderingand

Financial Stability

*British Business Group Breakfast Meeting, British High Commissioner's Residence, Dhaka, 8 June 2009.


Bangladesh Banking Sector : Vision for the Future*

We have got together at a time when the world's financial sector is at a cross-roads. The financial crisis that ignited in late 2007 in the aftermath of the crisis in the US subprime mortgage securities market soon spread all over the world like a raging wild-fire wreaking global financial sector meltdown with widespread solvency crises. Consequently, the global economy entered its deepest recession since World War II frustrating the prospects of stability, growth and equity.

The instant casualties in the global financial crisis were the giant developed economies such as US and UK, with massive bankruptcies and staggering amount of fiscal budget siphoned to bailing out of the troubled financial institutions in a bid to avert a systemic collapse. The fiscal maneuvering was coupled with central banks' drastic cut down in interest rates to zero bound and unprecedented quantum of monetary easing to stimulate the flagging economies. Although there were some weak signs of bouncing back, major economies around the world still appear to be in slumber. However, once the bail-outs, stimulus packages and social safety nets stall further free fall and consumer and business confidence is restored, the engine of growth will begin to whirl again.

While the grand edifice of financial superpower collapsed transmitting shockwaves to the remote corners of the globe through integrated financial networks, the financial sector in Bangladesh evidenced its immunity, thanks to a closed capital account and pre-emptive actions to secure its foreign exchange reserve position at the sight of some early signs of the crisis. Fortunately, the financial sector also stood resilient since it does not have exposure to risky derivatives market home or abroad. The financial sector reform programs that kicked off in the 1990s have instilled implementation of prudential regulation and supervision in the banking sector, which laid the foundation of sound and resilient financial sector.

However, we are neither complacent nor negligent since the level of financial sector development has a long way to go for fulfilling our cherished


dream of an inclusive, efficient and modern financial sector that allocates resources to most productive sectors of the economy and fosters pro-poor, sustainable economic growth and development. The level of financial intermediation is still very low with around 13% of the population having a bank account and a vast majority of people living in rural areas including the 40% below-the-poverty line population having virtually no access to finance. At the same time a large number of micro, small and medium enterprises that employ a major portion of our labor force, and make substantial contribution to economic growth are yet to have adequate access to credit for sustaining their growth. While we are pursuing a pro-poor economic growth, we cannot lose sight of environment-friendly and gender-sensitive finance to stay on a sustainable growth trajectory because sustainable economic growth strategy for Bangladesh entails expanding the capacity of our economy by encouraging entrepreneurship and widening the base of our domestic demand across various segments of population over time by increasing people's purchasing power.

The overarching goals of Bangladesh Bank, as Bangladesh's monetary authority and financial sector regulator and supervisor, are to achieve stability in both price level and financial sector. Pursuant to these goals, I envision a digitized, automated, knowledge-based, customer-focused and inclusive financial sector in the years ahead. With necessary infrastructural supports provided by the government and development partners like DFID, both the central bank and financial sector institutions will be able to collaborate in order to institutionalize a dynamic, efficient and resilient financial system.

As the monetary authority of Bangladesh, BB will continue its growth- supportive monetary policy strategy without compromising financial sector stability. While monetary policy continues to boost private sector credit growth to strategically important productive sectors, BB will also continue to formulate and implement prudential regulation and supervision in the financial sector with particular emphasis on liquidity, solvency, good corporate governance and sound risk management in banks and non-bank financial institutions. In this regard, we have already declared phasing in Basel 2, which will strengthen prudential supervision of banks based on risk-weighted capital adequacy, supervisory review and market discipline. These three pillars of Basel 2 would help ensure proper risk assessment and review, transparency, accountability and maintenance of adequate capital base by financial intermediaries to tackle periods of risky,innovative financial products. In order to deal with growing uncertainty and risks associated with innovative financial products in the fast changing financial intermediation industry BB has advised banks and financial institutions to create risk management units in their institutions which will be required to follow BB's prudential guidelines on risk management. To make credit risk assessment more objective, we will be emphasizing on sovereign credit rating agencies.

For the coming years, I envision a financial sector in Bangladesh that is continuously evolving towards a more modern and efficient system of finance that is supportive of greater investment and inclusive economic growth and BB making its transition to a modern, digitized and knowledge-based central bank


capable of taking pro-active policy actions for maintaining systemic stability and development. Drawing on the lessons from the ongoing financial turmoil, BB has decided to institutionalize an expert team of financial surveillance for early diagnosis and prognosis of financial system trends and tendencies in order to preempt potential crisis. Banks and non-bank financial institutions have also been advised to be more transparent and careful in their risk management and strengthen good corporate governance in order to ensure sound liquidity, solvency, profitability and growth so that they are able to contribute to sustainable economic growth.

The Global Recession notwithstanding, Bangladesh showed notable resilience with 5.9% projected FY09 GDP growth, 22.4% year on year (y-o-y) growth in remittances up to 11 months of FY09, 6.8 billion USD foreign exchange reserves, 14.5% y-o-y export growth and 10.6% private sector credit growth up to the third quarter of FY09. Keeping in view the looming fallout from prolonging of the ongoing Recession in future, monetary and fiscal policy authorities stand ready to cope up with adequate bail-out, stimulus packages and social safety net programs.

In order for economic growth momentum to pick up, and to be more broad-based, inclusive/ participatory/ pro-employment, gender-sensitive, and sustainable in an era of information technology and knowledge economy, BB has undertaken steps to modernize its credit information bureau, installed automated clearing house (ACH), initiated developing BB's own ERP software, chalked out plans to enhance the capacity of its human resources, strengthened regulatory oversight for strict compliance of corporate governance guidelines and emphasized agricultural credit for broadening access to credit to strategically important agricultural sector. At the same time, BB has also recognized the crucial role played by nonresident Bangladeshi's (NRBs) in the country's industrialization and capital market development by offering various investment/deposit instruments, facilitating public-private partnership for infrastructural development (such as industrial park, power generation etc.), improvement of social infrastructure, small and medium enterprises and so on.

In conclusion, I would like to quote from the great Bengali philosopher-poet Rabindranath Tagore: "Where the poor believe that they can be rich, the belief itself is a great asset for that country. If we say that our country is short of funds that understates the reality. The fact is that there is a dearth of confidence in our country." As the central bank of Bangladesh, we would like to draw on the spirit that enabled us achieve an independent nation status and instill the 'bharasha'(confidence) that we need to successfully march ahead with our home-grown economic development strategy as a dignified nation in the world.

*BBTA workshop on 'Enterprise Risk Management' on 7 December, 2009.


Enterprise Risk Management*

Automation may lead to newer risks. We need to monitor and manage risks. Enterprise Risk Management (ERM) refers to the methods and processes used by organizations to manage risks related to the achievement of their objectives on an enterprise-wide scale. ERM can also be described as a risk-based approach to managing an enterprise, integrating concepts of strategic planning, operation management, and internal control.

ERM provides a framework for risk management, which typically involves identifying particular events of circumstances relevant to the organization's objectives, assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring progress. By identifying and proactively addressing risks and opportunities, business enterprises protect and create value for their stakeholders, including owners, employees, customers, regulators, and the society they operate in.

Benefits of ERM

The gradual transition from conventional risk management to all encompassing ERM has enabled management to be aware of the risks to which it is susceptible, while developing plans designed to respond to these very risks. The capabilities inherent in enterprise risk management help management achieve performance and profitability targets and prevent loss of resources. ERM ensure effective reporting and compliance with laws and regulations, and helps avoid damage to the entity's reputation and associated consequences. In sum, ERM helps a business get to where it wants to go and avoid pitfalls and surprises along the way.

Why ERM in banks?

The advance of technology, the pace of business, globalization, increasing financial sophistication all contribute to the growing number and complexity of risks that meet banks. Especially, banks in this region operate in more volatile financial markets and face higher economic and financial uncertainties; they are also undergoing significant structural changes with respect to deregulation, privatization, and consolidation. ERM has gained substantial momentum


because of the growing importance of solutions for compliance and regulatory norms (including BASEL II) for which ERM lays down the foundations. Triggers for ERM implementation in banks include catastrophic events such as stock market crashes and the current credit crisis, credit rating processes, compliance with regulatory bodies such as the Central Bank and other government regulatory bodies, the introduction of ERM by competitors, challenges posed by new or emerging products and the dynamic nature of business risk.

A successful enterprise risk-management process can help a bank meet many of these challenges by providing a framework within which managers can explicitly consider how the bank's risk exposures are changing, determine risk mitigates and controls in place to limit risk to targeted levels.

ERM and Banks in Bangladesh

All financial institutions need sound risk-management practices. Central banks should ensure that banks prudently manage the risks as these can cause systemic threats and jeopardize the stability of the entire financial system. Over the past decade, western banks have made significant improvements in Risk Management practices. Following global financial crisis these banks have become even more risk conscious. In comparison, most of our banks need to improve their risk management capabilities. However, they lack critical human, data, and modeling resources to attain such capabilities.

The central bank is concerned about and responsible for the financial system stability in the country. It has therefore instructed the banks to establish separate Risk Management Unit (RMU) and ensure proper monitoring of the functions of the unit. Terms of Reference (TOR) for RMU have also been issued. The banks will bring all the core risks related activities under this unit so that they can understand all the existing and probable risks in the organization and be able to manage them in a prudent manner. The Risk Management Unit will conduct not only stress testing for examining the bank's capacity of handling future shocks but also deal with all probable risks that might occur in future. As supervisors, we want to ensure that banks are not only identifying, measuring and managing their risks but are also developing and maintaining appropriate corporate governance structures appropriate for their business activities and risks taking. There is no other way but to have hands on training on risk management to attain the needed supervisory skills. This workshop is perhaps the best way to attain such skills. And, this should not be just a one shot affair. We have to continuously update our skills on risk management.

*The 9th Nurul Matin Memorial Lecture on Ethics in Banking organized by Bangladesh Institute of Bank Management at Dhaka Sheraton Hotel on 8 December 2009.


Ethics in Banking*

We are deeply thankful to Dr. Akbar Ali Khan for his paper on banking ethics presented before this audience representing the banking community in Bangladesh. In his erudite and important contribution on the subject Dr. Khan has delved deep into the epistemological roots of the notion of ethics in banking identifying various strands of thoughts; recounted recent episodes of ethical lapses and slippages in the global and domestic scene; and suggested ways for deepening and safeguarding ethical conduct in banking business in Bangladesh. Drawing from the divergent strands of thoughts and approaches his paper identifies integrity of financial intermediation as the primary ethical obligation and reduction of 'manifest injustice' (following Amartya Sen's Idea of Justice, 2009) as the secondary ethical obligation in banking, both 'conventional' and 'alternative' (Islamic banks, MFIs, cooperatives etc.).

The urge for ethical conduct originates from the core values of civilized social life (including justice, fairness and trust) that are common across varied structures of social organization (religious, secular, democratic, totalitarian, capitalist, socialist and so forth), usually enshrined in state constitutions. Regulated and supervised financial service providers of all descriptions including 'conventional' and 'alternative' banks operate in the same market and therefore need a common set of ethical codes, drawn from the core values of civilized social life.

Ethical banking behavior at the institutional level is enjoined by standards of good corporate governance with transparency and safeguards against collusive dealings between insiders or with connected / related interests. Clearly laid out accountabilities and mandatory disclosure requirements facilitate the watchdog role of market discipline, besides usual supervisory oversight. Ethical conduct in banks at the personal level is enjoined by binding clauses in service regulations / employment contracts, with clearly laid out accountabilities and disclosure requirements about connected / related interests as and when occasions arise.


Besides the basic ethical concerns for integrity and trust in financial dealings, financial inclusion opening up blocked advancement opportunities for the poorer population segments is a social obligation based on ethical concern for fairness and justice. Conducting business in environmentally sustainable ways is likewise another obligation based on ethical concern for fairness to our younger and future generations. Banks in Bangladesh are yet to embrace financial inclusion and environmental sustainability wholeheartedly as an ethical and social imperative.

Even in traditional financial intermediation, although the quality of bank lending has been improving steadily, episodes of improper collusive lending and undue favors to influential connected / related parties, driven by perverse incentives, still show up quite often in offsite and onsite supervision routines, evidencing deficiencies and lapses in ethical codes and practices. We in BB shall be very happy to see and support collective initiative of banks and financial institutions in Bangladesh in revisiting their vision / mission statements and their corporate governance, lending and environmental policies and practices towards clearer, sharper restatement and observance of ethical goals and standards at institutional and personal levels. To be inspiring and effective, the initiative will need to be bold and ambitious, aiming at matching, and where feasible even surpassing current international best practices. Clauses espousing commitments to financial inclusion with high priority for lending for productive pursuits generating income and employment, and to shun entrapping individuals and households into spirals of non-essential consumer debt could be among such pioneering inclusions in ethical codes of banks. Adoption of IT based processes and practices now in progress in banks will facilitate the functions of market discipline and regulatory oversight; the possible role for a banking ombudsman's office may also be mulled over.

Dr. Khan's paper is replete with important insights on strengthening the various aspects of market discipline and regulatory oversight towards ensuring ethical practices in banking; some of these dwelt upon further in the valued speech of our chief guest, the honorable finance minister. I would like to limit myself here to a few general observations.

Firstly, we in BB do not see 'conventional' and 'alternative' banking as mutually exclusive, involving any tradeoff. Promoting financial inclusion by reaching out to the poorer under-served population segments is at the same time an ethical obligation (opening up advancement opportunities for the disadvantaged) and a business case (forgone current income if any actually being investment in expanding customer base for potential future income). Secondly, we need to ensure just and ethical conduct in all regulated financial service providers regardless of the market segments they operate in, so that none can profit from unethical conduct without facing penalty from market discipline or from regulators. In regulatory oversight to ensure ethical behavior, preventive safeguards requiring transparency and clear accountability in institutional practices and processes are likely to be more effective than heavy post-offence deterrent penalties. Lastly, I have some unease about viewing reduction in 'manifest injustice' as a secondary obligation in banking ethics.


'Manifest injustice' is too glaringly wrong for us to be content with merely reducing; earliest possible elimination of such injustice warrant being as much a primary obligation as integrity in financial intermediation. As I have tried to explain earlier; integrity in financial intermediation is fully compatible with socially and environmentally responsible banking enjoined by the ethical obligation of combating manifest injustice, and need not be viewed as mutually exclusive. It is of course not for banks alone to fight and eliminate all manifest injustices in social life, the government and the civil society have their roles and responsibilities. It is important that we bankers accept the obligation to play our due role with prudent, responsible use of resources provided by depositors and equity holders. Embracing of social and environmental obligations in ethical codes, and enhanced transparency and accountability in financial intermediation enabling effective market discipline and supervisory oversight will be the way forward in deeper ingraining of ethical conduct in banks and other regulated financial service providers in Bangladesh.

*ABB conference on Basel II accord at Westin Hotel, Gulshan, Dhaka on 9 December 2009.


Implementation of Capital Adequacy and Risk Management*

It is very heartening to see our banking community as keen and enthusiastic about implementing the new capital regime as we in Bangladesh Bank expected them to be.

We may quite rightly feel happy about our banks and financial markets having weathered the recent global financial turmoil virtually unruffled, retaining the ability of helping out the real sector while financial markets and institutions in mature advanced economies needed huge government bailouts. Despite some lingering legacies from past non-market era of directed lending and weak lending discipline, we in Bangladesh have opted to be ambitious in embarking on initiatives aimed at earliest possible attainment of global best practice standards in soundness, solvency and risk management processes in banks. Implementation of the Basel II capital adequacy framework is a major component of this thrust. Following year-long extensive preparatory work the implementation processes were formally kicked off in December 2008, with BB guidelines issued to banks for working out and reporting their regulatory capital requirements under Basel II regime on a quarterly basis from 2009 onward. For the first year (2009) this was to run in parallel with the preceding Basel I minimum plus two percent regime, with full transition to Basel II from 2010. I am happy to note that this transition is taking place without any major hiccup .

Basel II capital regime documentations are quite formidable in bulk and complexity, reflecting the range and complexity of the businesses of modern banking. The underlying premises and rationale are fairly straightforward, however, based on three pillars.

Regulatory capital, the first pillar, requires banks to maintain adequate risk weighted capital cushion against expected and unexpected losses from all types of risks inherent in each and every asset holding and business line. Besides credit risk and market risks taken care of in the preceding (which has been amended) Basel I regime, the Basel II regime also provides methodology for


working out capital requirements against operational risks that triggered quite a few episodes of collapse of large globally active banks in the past decades.

Supervisory review, the second pillar of Basel II capital regime, requires banks and the supervisors not just to ensure that banks hold adequate capital cushion against all risks associated with their businesses, but also to ensure that banks have policies and processes in place for assessing, monitoring and prudent management of the risks. For the banks this second pillar enjoins active board and senior management oversight, forward looking capital adequacy assessment bearing in mind the ambient business cycle phase; adequate processes for monitoring and reporting of risk exposures; and periodically reviewed strong and effective internal control processes. For supervisors, the second pillar enjoins regular review of adequacy and effectiveness of capital assessment, risk management and internal control practices in banks; seeing to it that banks operate above their minimum regulatory capital ratios; intervening early for preventing slippages of capital ratio below the regulatory minimum; and rapid remedial actions in the event of any such slippage.

Market discipline, the third pillar of Basel II, complements the regulatory capital and supervisory review pillars, with requirement of sufficient transparency to enable stakeholders to make their own assessments about the risk profiles of the asset holdings of a bank and the adequacy of its capital in meeting probable losses. This pillar enjoins banks to develop formal disclosure frameworks providing sufficient qualitative and quantitative disclosure of validated (i.e., audited) material information at regular periodicity.

As elsewhere, the standardized (rule based) approach in calculating the risk weights for credit and market risks and the basic indicator approach in calculating capital charges for operational risks have been prescribed for adoption by banks in Bangladesh in the implementation guidelines issued by BB; two external credit assessment agencies have been accorded recognition for rating of borrowers in the standardized approach. Over the medium term, banks are expected to develop finer tuned internal model based borrower rating and capital assessment approaches; with the BB developing its capacities for supervisory validation and authorization of the model based approaches developed by banks.

The very structure of the Basel II capital adequacy framework requires the risk management capacities and practices of banks to improve concurrently with implementation of this new framework. For banks in Bangladesh successfully implementing the Basel II, this would therefore mean huge leap forward in strength and credit rating; with commensurate gains in ease of access to correspondent relationships, credit lines and other linkages with the global financial markets.

Banks in Bangladesh must be under no illusion that implementation of the Basel II capital regime is an easy task, to be handled casually. Actual implementation in proper spirit will be arduous and painstaking, entailing


comprehensive overhaul and upgradation of previous approaches and practices in risk assessment and management, requiring adoption of new IT based tools and techniques, perhaps with support services of outside consultants and professional experts. The BIBM, and local firms offering IT solutions and other professional consultancy services can be of assistance to banks in this respect, where necessary, with support and collaboration of external associates.

In particular, I would love to see the energy and talents of the young crop of local software service professionals utilized in tailoring risk management solutions appropriate for the local market context. A lot, however, depends on the commitment of the top leadership of our banking sector. That they are aware of this responsibility is reflected in this timely initiative.

* Seminar on 'Decade of Loan Syndications' organized by Prime Bank Limited at Radisson Water Garden Hotel, Dhaka, 18 April 2010.


Decade of Loan Syndications*

Loan syndication becomes necessary in meeting financing needs of large projects. High credit risk exposure on any single borrower can be hazardous; default on such a loan can wipe out a lender's capital base. This is why prudential regulations limit permissible single-borrower exposure in terms of percentage of a lender's capital base.

Borrowing needs of large new industrial and infrastructure projects coming up in Bangladesh now typically run into billions of taka. Sharing of the credit risk burden of large loans to large projects by syndication has enabled fast expansion of industrial term lending, particularly since the late nineteen nineties (table 1, chart 1). Prime Bank's engagements in syndication activities have been significant, acting as lead arranger in 21 syndications (including one that was shariah based) totaling Taka 11.5 billion for various projects in physical and telecommunication infrastructure, glass and ceramics, textiles, chemicals, pharmaceuticals, tourism and hospitality.

BB does not as yet collect and maintain systematic time series data on loan syndication activities in Bangladesh, which need to begin forthwith. Informal query reveals that so far none of the syndicated loans in Bangladesh were rated by independent credit raters. The Basel II capital regime assigns 125 percent risk weight (i.e., capital charge of Taka 125 for every Taka 100 of loan) on unrated syndicated loans, whereas favorable rating by independent raters can bring the risk weight and capital charge down to as low as 20 percent, freeing up substantial capital resources for other lending. Syndication partner banks will therefore be well advised to obtain independent rating on syndicated loans, to bring down the risk weight and capital charge.

The syndication process splits and spreads the credit risk to sizes manageable by individual syndication partner banks, but in itself has no mechanism to minimize the liquidity risk and interest rate risks from term mismatch (funding long term assets with short term deposits). In the advanced markets trading in loans (or in securities backed by the loans) mitigates liquidity


risks for syndication partners; and floating rather than fixed lending interest rate mitigates their interest rate risks. None of these devices are yet in significant use in our market. Syndication activities have lot further to grow in Bangladesh in financing various large real sector projects.

Banks arranging / partnering in loan syndications will be well advised to begin adopting these risk management options; for sound and surefooted growth in loan syndication free of stumbles from liquidity and interest rate risks. BB will provide such policy and technical support as may be needed.

Syndication partner banks need to bear in mind the risks in excessive leveraging that in the recent global financial crisis brought numerous major corporates and financial markets in mature developed economies down to their knees. In Bangladesh, syndication arrangers and partners need to limit their lending to cautiously conservative levels of debt equity ratios; with careful eye on any overvaluation of owners' equity. The loan agreements should include covenants requiring the borrower projects to go for public issue of equity after pre-specified periods, with appropriate penal clauses to be activated on default.

Annual movement of Industrial term loans

(Disbursement & Recovery)

Year

1994-19951995-19961996-19971997-19981998-19991999-20002000-20012001-20022002-20032003-20042004-20052005-20062006-20072007-20082008-2009

1281.201230.441200.001120.341330.101627.263057.073505.153961.996675.998704.529650.02

12394.7820150.8219972.69

481.11519.69887.19859.43

1093.311653.342795.103212.973835.124963.448546.986759.529068.45

13624.2016302.48

Disbursement Recovery(Tk. in Crore)

Source: SME & Special Programmes Department, Bangladesh Bank.


Annual movement of Industrial term loans

25000

20000

15000

10000

5000

0

1994

-199

5

1995

-199

6

1996

-199

7

1997

-199

8

1998

-199

9

1999

-200

0

2000

-200

1

2001

-200

2

2002

-200

3

2003

-200

4

2004

-200

5

2005

-200

6

2006

-200

7

2007

-200

8

2008

-200

9

Disbursement

RecoveryTk. i

n cr

ore


Assessment of Corporate Governance in Bangladesh*

I heartily welcome BEI's launching of WB Report on Observance of Codes and Standards (ROSC) of Corporate Governance in Bangladesh, providing updated benchmarking of where corporate governance now stands in Bangladesh in terms of global and local standards, taking due note of progresses made, and also putting forward recommendations about the reforms needed in lifting our corporate governance practices to the levels of global best practice standards. I hope this ROSC will greatly benefit all practitioners and regulators of corporate governance in Bangladesh in hastening the ongoing continual upgradation of corporate governance in Bangladesh.

We all know that sound corporate governance is crucially important for investors' confidence and stable growth and development of the capital market. As the financial sector regulator BB has always been proactive in prescribing and revising the minimum required standards of corporate governance including disclosures, and risk management in banks and financial institutions. The financial and non-financial disclosure requirements for banks are now under review in BB following adoption of the Basel II capital regime, for effective market discipline, the third pillar of Basel II. For banks and financial institutions, BB has chosen to supplement the guidances of the Companies Act with more specific guidelines on key issues including roles, responsibilities, tenures and fit and proper tests for board members and senior managements; conflicts of interest,lending to connected interests and so forth. For some years now, the IFRS is already the financial reporting standards adopted by BB; financial reporting requirements for banks and financial institutions are gradually being brought into full convergence with IFRS.

Needless to say, financial and non-financial corporates operate not in isolation from each other but in one and the same business environment; corporate governance reforms cannot proceed smoothly in one part without progress in similar reforms in other parts. The ROSC has appropriately pointed out the need for comprehensive reforms in the Companies Act and other relevant laws, guidelines and practices regarding corporate governance in all

*BEI's launching of the WB Country Assessment of Corporate Governance in Bangladesh, 29 May 2010.


corporate entities, financial and non-financial; the need for institutional strengthening, particularly of the office of the Registrar of Joint Stock Companies, has been correctly emphasized. I hear significant progress has already been made in improving the capacity of the Registrar of Joint Stock companies and IFC has been playing a very supportive role in achieving this success. Use of ICT has also been enhanced in this endeavor as well.

Thus far, corporate governance reform initiatives in Bangladesh have been driven mainly by regulators, in consultation with Chambers and other associations representing financial and non-financial corporates. In future, we would prefer to see the Chambers and other business associations taking grater role in coming up themselves with new reform proposals along lines of international best practices. Indeed, the future reform process should be more demand-driven rather than regulator-led. Most companies, I am sure will find positive long term interests of their companies in this reform process. This approach will make it easier for regulators to shape up reforms that more closely fit the needs of the evolving corporate marketplace. I am also pleased to hear some positive comments about Bangladesh Bank's efforts in strengthening the capacity of the board members of banks and other financial institutions. We have recently issued a comprehensive guideline incorporating all the regulations under one cover along with a well-focused shorter version. I am happy to know about the strategic role of the media in taking the relevant issues of corporate governance to the people. Journalists can throw necessary lights on both dark and bright courses of companies if they can read the balance sheets properly. BEI deserves to be complimented for organizing necessary trainings for the journalists on corporate governance with support from Thomson Reuter Foundation. Finally, I must also thank BEI and others involved in strengthening corporate governance in Bangladesh. We surely need good companies to make good corporate environment.


Ethics in Banking*

The Nurul Matin memorial lecture series on Ethics in Banking is the lone major national level event to raise issues and to spawn thoughts and deliberations on ethical standards and norms in the financial services industry in Bangladesh. We are extremely grateful to Dr. Mohammad Farashuddin for the illuminating lecture he has kindly delivered today on the subject, rich in erudition and replete in wisdom distilled from decades of his diverse experience in the national civil service, at the UN, in academia, and at the helm of the central bank in Bangladesh. We are also fortunate to have with us Mr. A.K.N. Ahmed who initiated this lecture series to regularly refresh and rekindle our awareness of ethical issues in banking, commemorating late central banker Mr. Nurul Matin whose heights of ethical standards remain well worth living up to.

The crisis of values and ethics alluded to in Professor Farashuddin's lecture afflict today's banking and financial services industry both globally and locally. The recent global financial turmoil originated in aberrant quests of quick high gains from irresponsible risk taking, alongside collusive insider trading by dominant shareholders and senior managements undermining institutional viability and the interests of small equity holders. The crisis pulled down major mature Western economies along with their financial markets; creating the still prevalent public ire about greed of senior bankers for high bonuses and perks while the economies they pulled down remain yet to be fully restored to health. The sources of ethical lapses and malaises in the banking industry in Bangladesh are well summarized in Professor Farashuddin's lecture. Based on his valuable first-hand experience in grappling with these, Professor Farashuddin sees the remedies primarily in adoption and meticulous implementation of more elaborate, more rigorous legal and regulatory structures to ensure desired moral and ethical behavior in financial service providers in Bangladesh. I do not find much to differ with the remedial approaches suggested in his lecture, the suggestions will be valuable to banking practitioners and the regulators in shaping up higher ethical standards in financial institutions and markets in Bangladesh. I would like to add here a

*Tenth Nurul Matin Memorial Lecture on 'Ethics in Banking', organized by Bangladesh Institute of Bank Management (BIBM) on January 3, 2011.


couple of comments on Professor Farashuddin's observations about directed lending from the state owned banks; and on the need for stronger, more profound instilling of ethical values to set motivations right, besides regulations, in ensuring high ethical standards.

Professor Farashuddin correctly points out accusing loan forgiveness and lax loan rescheduling for influential borrowers as collusive and ethically indefensible; and despite continuing efforts there is no denying the reality that corporate governance either in government owned or private sector banks is as yet not strong enough for altogether rooting out these indefensible practices. Besides continual strengthening of regulation and supervision, regular periodical stakeholder dialogues in banks on ethical issues involving board members, senior management, representatives of employees and perhaps also of small shareholders and depositors may be one way of keeping ethical issues in the foreground. Adequate protection for whistleblowers reporting serious irregularities may also be contemplated. The media too can play a facilitating role in forcefully voicing social demand for more and more ethical banking.

I cannot altogether agree with the suggestion in Professor Farashuddin's lecture that lending by government owned banks is commercially unprofitable but socially desirable priority sectors should be subject to the same regulatory limits as loans to equity holding directors in private sector banks. Loans to private sector bank directors are for private interests, while socially desirable lending to unserved or underserved economic sectors and population segments serve public interest, promoting financial inclusion towards inclusive economic and social growth. With the CSR guidance for the financial sector and the campaign for broader, deeper financial inclusion, Bangladesh Bank is getting also the private sector banks engaged in lending to socially desirable sectors, side by side with government owned banks. CSR and financial inclusion are moral and ethical imperatives towards equitable, inclusive growth and poverty elimination; and the engagements that may be commercially unprofitable today are also groundwork for profitable business over the medium term.

I would look forward to BIBM being proactive in promoting dialogues on banking ethics, including this subject in its various course curricula and in its year round schedule for seminars and workshops. Let me conclude here expressing my gratitude again to Professor Mohammad Farashuddin for his valuable lecture and to the chief guest A.K.N.Ahmed for being present with us in the event.


Better Supervision and Better Banking in a Post-Crisis Era*

We have benefited vastly from discussion in various session at such a high level meeting event on issues of topical importance for better banking efficiently allocating credit and investment resources by Asian banks in the post crisis era, guided by a sounder supervision regime maintaining financial stability and bolstering safeguards against possible future episodes of systemic crisis and contagion. Much of the contents of discussions in different sessions relate to rather more developed markets and more advanced banking institutions than those now in the developing financial markets and banking institutions in Bangladesh operating in a regulatory regime of limited openness to external markets. The limited, regulated external exposure served well in shielding our financial markets and institutions from contagion and debacle in the recent global crisis, the financial system in Bangladesh remained unscathed by the crisis, well poised to support recovery of the real sector from demand weakness in traditional Western export markets.

In Bangladesh Bank we keep track of developments in supervisory approaches and techniques in Basel based expert forums as also in various regional forums. Aspects of the newer approaches that are of immediate relevance to our domestic context are adopted as soon as practicable; implementation experiences elsewhere of approaches that are likely to be of future relevance as our markets and institutions develop and open up further are also monitored duly. Being a developing market and supervisory regime with other more advanced peers ahead in the learning curve enable us to learn from implementation glitches and pitfalls faced elsewhere. Bankers in Bangladesh are now busy adjusting themselves properly to the Basel II capital regime (mandatory from 2010) and its attendant risk rating and risk management structures. Basel III capital requirement enhancements will be phased in duly. Regular stress testing has been introduced mandatorily to bring out vulnerabilities in banks. Existing statutory liquidity requirements are being weighed against the new global standards on liquidity risk for implementing such changes as may be needed. We are looking forward to revised global

*Roundtable discussion session at a FSI-EMEAP high level meeting on 'better supervision and better banking in a post-crisis era', January 2011.


standards of fair value accounting, although tradable securities as yet do not comprise very significant parts of asset books of our banks. Our banking institutions are as yet nowhere near assuming global too big to fail or too important to fail stature; for branches of large global banks in Bangladesh we expect co-operation and access to pertinent supervisory information from home country supervisors. And of course we appreciate and highly value training support for our supervisory staff from central banks and regional/global supervisory forums.

In conclusion, I would wish to share with you my apprehension that we may engage only in technical, quantitative issues in capital adequacy, risk management and so forth. Despite very elegant supervisory structures we may be missing out on something important in limiting supervisory dialogues covering such aspects we hear about mature financial markets in advanced economies like USA and UK failing to financing SMEs adequately or on affordable terms, while we do not hear about similar financing difficulty for activities of questionable merit like speculation and leveraged buy-out of equity. I see no reason why global (or perhaps Asian) qualitative best practice norms and standards cannot be drawn up and adopted prioritizing economic sectors and activities in financing; sources of growth and employment generation like SMEs should receive high positive priority, while speculation, gambling and other socially, morally or environmentally questionable activities that create sources of destabilization may merit being placed high in negative priority. Since qualitative global best practice norms are working well in combating money laundering and terrorism financing, there appears to be no reason why this should not work in attaining better allocation of financing, eliminating pockets of exclusion of positive growth sources and instead delineating new exclusion are as for questionable and potentially destabilizing activities. In Bangladesh we are already practicing qualitative promotion of financial inclusion alongside discouragement of speculative, wasteful and non-essential use of credit resources.


Corporate Governance*

I am very glad to be here at the launch event of an important new initiative: that of grooming up a crop of trainers to train bank directors in upgrading and strengthening corporate governance practices in their banks. As you have heard from the previous speakers, governance issues are of concern not only in developing market economies like ours, governance lapses and weaknesses in large financial institutions based in mature advanced markets figured significantly in precipitating the recent global financial crisis.

Standards of corporate governance practices are being reviewed by expert consultations in global forums, alongside reviews of standards in accounting, regulation and supervision. The focus in reviews of corporate governance standards is on bolstering safeguards against directors and the senior managements pursuing short term gains at the expense of longer term institutional viability and soundness. This enjoins active engagement of directors in strategic planning exercises setting goals and objectives with due attention to social, ethical and environmental obligations, and in pursuing action plans for attainment of these objectives and goals with continuous close attention on risks to institutional soundness and safety. The global financial crisis showed once again how dereliction in risk appraisal and risk management can imperil the very existence of a financial institution. In our local scene banks are, of course, in overall good health, but you are aware of recent market events laying bare the stresses caused in a few smaller banks by aggressive forays for quick gains in investments made without due heed of underlying risks. Bangladesh Bank will as always be unrelenting in imposing necessary investment discipline, boards and senior managements of these banks must get their act together in shoring up corporate governance, shunning the habit of lobbying for waivers and exemptions from regulatory discipline.

Corporate governance practices prevailing in Bangladesh are yet to measure up to international best practice standards on important counts, like adequate transparency and safeguard of interests of minority stakeholders. Our corporates with aspirations for cross-border expansion and capital issues in

*Launching ceremony of the Financial Markets Recovery Project (FMRP) of the Global Forum (GCGF) on 3 March, 2011 at Spectra Convention Center, Dhaka.


international markets will need to measure up rapidly in their governance practices. I would like to express my appreciation for BEI championing for some years now this important cause of upgrading corporate governance in Bangladesh. IFC-FMRP collaboration in this initiative of training of trainers who will help bank directors better understand their roles and responsibilities and motivate them to be proactive change agents is a very timely, very welcome help. The choice of banks as the corporate sector to begin with is very appropriate; as banks can promote better governance in non-financial corporates simply by requiring it as a loan conditionality. Co-sponsoring of the event by BAB confirms its relevance to needs felt on the bank owners' side.

The core body of BB instructions delineating roles, responsibilities and accountabilities of directors, chairpersons and chief executives of banks were issued quite some years back, in 2003. Roles and responsibilities for the executive committees and audit committees of bank boards were also prescribed therein. There is a case for considering revision in these instructions in light of current global best practices,particularly in areas of delineating roles for senior management members other than the chief executive, and for some new committees of boards on issues like executive compensation and succession planning. Such revisions are best handled in consultation and collaboration with proactive agents of positive change in bank boards. I am therefore looking forward to this initiative of BEI, IFC and BAB yielding us in the coming months a substantial bunch of bank directors well trained and well motivated in their roles and responsibilities in safe and sound steering of their banks on stable growth path through upswings and downswings in the unfolding local and global scene. I hope this initiative contributes significantly towards building trust and confidence in the banking sector of Bangladesh.


Global Experience on Economic Regulation*

But for the recent global financial crisis that markets and institutions in mature advanced economies are still to recover fully from, the title chosen for this session would probably have been disputed hotly; many would have complained about feeling of suffocation from over-regulation. Chastened by the crisis, there have been only mild protestations about the extent of rigor in post-crisis regulatory revisions plugging gaps and tightening regulations in various areas including risk management, capital adequacy and liquidity. Reforms in norms for leveraging, market-to-market valuations, executive compensation etc. are also in process. The financial sector in Bangladesh with its limited, regulated external exposure was virtually unaffected by the global crisis; remaining liquid, solvent and free of contagion from toxic assets. Nonetheless, following the crisis, regulatory oversight on risk management has been strengthened, compulsory stress testing routines have been introduced to bring out vulnerabilities. Banks are now under Basel II capital adequacy regime, with the Basel III modifications to be phased in duly.

Wide ranging as the post-crisis global financial sector regulatory reforms may seem, the actual changes are really incremental and marginal rather than very extensive or radical; some of the changes (like those in capital requirements) will be introduced gradually over a number of years. Little has been done so far on important overarching issues like preventing buildup of global imbalances from persistent unbalanced domestic policies in major economies; and in reforming the global monetary order with a mechanism tethering global liquidity expansion to growth in real global output of goods and services, so as not to permit the financial sector run amok with speculative excesses.

While some regulatory deficit did exist in the run up to the global crisis, having a more complete regulatory toolkit with the deficits plugged in will not by itself make the financial sector more immune from future recurrence of crisis situation. The main factor setting the global financial system on slippery path to crisis was not a deficit in regulation but gross neglect and lapse in

*2nd CUTS-CIRC International Conference on Reviewing the Global Experience on Economic Regulation- A Forward Looking Perspective held in New Delhi, India on 19 April, 2011.


compliance with regulations that existed, particularly in areas of risk appraisal and containment. The problem is rooted deep in human nature. In good times we tend to disregard and cut corners around regulatory disciplines, to ignore looming buildup of risks until a crisis befalls, and sit down to rewrite cautious regulations afterwards. The mood of caution does not last long after the crisis is over; when good times roll in things revert back to the old cycle of compliance lapse-risk buildup and crisis-regulatory revisions. We need to bear this reality in mind while attempting to chart safe and stable progress path for the financial sector.

The main thrusts of post-crisis regulatory reforms focusing on vulnerabilities of financial institutions and markets are broadly appropriate; but some promising approaches for better stability remain under-explored. One of these is a drastic diminution of the heavy dependence of banks and financial institutions on deposits and debts repayable with interest at agreed rates, regardless of whether they sink or swim. In severe downturns and crisis situations this becomes a recipe for market collapse with chains of default. Liabilities of profit and loss sharing equity nature sidestep this hazard, in downturns a bank/financial institution pays against such liabilities only as much as it can, free from worries of default and insolvency. Financing funded by liabilities of such equity nature is not new, and is in practice for several decades now in Islamic banking. Conventional banking is of late getting into this funding mode gradually. Regulators are encouraging increase of contingent bonds convertible to equity in capital bases of banks, and major international banks already have active Islamic banking business lines. More can however be done in faster mainstreaming liabilities of profit and loss sharing equity nature in banks and financial institutions, bolstering financial stability.

Conventional banking remains preoccupied mainly with urban based financial services to the affluent, interest margins on loans to affluent have eroded because their businesses have easy access also to capital markets for low-cost fund raising. In quest of high returns, banks have gone into speculative investments in capital and commodity markets, and in trading of complex opaque financial products (much of which proved worthless and toxic in the global financial crisis); while neglecting small businesses and people of small means, creating swathes of financial exclusion even in mature advanced economies. Sensitizing the financial sector about its social responsibilities is a necessary but not in itself sufficient remedial step; some extent of regulatory imposition is also called for. Despite fierce resistance from vested interests in developed economies, there is no reason why globally adopted discipline should not debar banks and financial institutions from position taking in commodity futures to profit from volatility at the expense of consumers and governments subsidizing essential commodities for low income people. Instead of engagement in speculation, globally adopted best practice norms can require the financial sector to set right the market gaps and failures it created and ignored; channeling adequate financing for small holder farming, SMEs, and other underserved productive pursuits. This will open up profitable new business opportunities for lenders in new customer bases, while also promoting broad-based, inclusive and stable growth.


At BB we are already pursuing a twin approach of discouraging unproductive lending for conspicuous consumption or for speculative activities, at the same time resolutely pursuing fuller, deeper financial inclusion of the excluded and the underserved, in a developing economy paradigm of growth and financial stability. Recent steps in this direction include support and encouragement for partnerships between banks, MFIs and IT platforms for innovative cost-saving, risk-mitigating modes of financial service delivery to small farmers and other underserved population segments using mobile phones, POS terminals etc.; a special lending arrangement recently introduced in collaboration with an MFI is now catering to needs of growing number of tenant farmers; refinance schemes (some of these co-financed by multilateral development partners) are catering to transient liquidity needs of lenders to the under-served productive sectors (agriculture, SMEs) as also to renewable energy and environmentally benign projects. Interest rate subsidy from government is available to lenders for financing growing of high value spice crops; BB is facilitating the process by paying the subsidy upfront on government's behalf. More than nine million new bank accounts in the names of rural farmers have been opened recently with deposits as low as 10 Taka per account, and a lately opened help desk in BB has heightened BB's responsiveness to outsider queries and complaints in all matters relating to financial services and BB's oversight function.

Focused attention on financial inclusion has already started paying dividends in terms of poverty reduction and broad-based inclusive economic growth. Buoyant output activities in agricultural, manufacturing and service sectors indicate likelihood of near seven percent real GDP growth in FY 11 and the economy is well poised for further growth acceleration in the coming years. Financial sector regulatory responses will have to keep pace with the creativity and ingenuity of the real economy in its fast growing adolescent stage.


Financial Stability and Risk Management in the Banking Sector*

Effective management of risks in the working environment is important for soundness and survival of every business of all kind. For banks/financial institutions risk management has an additionally important systemic dimension. Illiquidity and insolvency from poor risk management practices in a bank/financial institution imperil not only its own survival, but also the stability of the entire financial system by contagion to other banks/financial institutions in chained links of exposures. Further, because the financial system allocates and provides financial resources to the real sector of the economy, financial sector instabilities and crises get quickly transmitted to the real economy. The most recent example still all too fresh in memory is the global financial crisis of 2008 spawned by gross lapses in risk appraisal and management, leading to massive pile up of shoddy assets and opaque derivatives in large globally active banks, followed by global economic downturn. Chains of market freeze-ups and insolvencies of businesses and households brought enormous human distress and misery with mass scale job losses and homelessness in mature advanced economies, besides colossal financial losses, by some estimates amounting around USD 20 trillions.

The crucial role of banks and financial institutions in systemic stability arises from their much higher leverage levels compared to those of non-financial businesses. While a debt equity ratio of 100 percent will often be viewed as high for a non-financial business, a deposit and debt: equity ratio of 1000 percent will not be seen as unusual for a bank. Own equity comprises a small portion of working funds of a bank; its investments are funded largely by deposits from individual and institutional clients who have confidence on its reputation, solvency and liquidity. Reputation and market confidence permit a bank to deploy bulk of the deposits in income bearing investments in loans and other financial assets of diverse maturities, keeping only a small portion in cash and readily encashable liquid assets to meet withdrawal needs of depositors. In the event of risk management lapses seriously eroding market confidence on the soundness of a bank, withdrawal rush of depositors (called bank runs)

*Seminar on "Financial Stability and Risk Management in the Banking Sector" organized by Dhaka School of Economics & Bangladesh Economic Association at Bangabandhu International Conference Centre on 26 April 2011.


render it unable to meet the heavy withdrawal pressures despite owning investment assets that cannot be readily called in or sold off for cash. The liquidity difficulties also render the bank unable to settle clearing and other interbank payment obligations, spreading the crisis of confidence and bank run by contagion to other banks, including even those not negligent in their own risk management practices. Full blown, system crisis thus breaks out, requiring public authorities to step in massive bailouts and support interventions to restore stability. With the high degree of external openness and integration of global financial markets, a local crisis in one open economy quickly spreads across national borders to institutions and markets in other open economies in chains of linked exposures. Of this, we saw examples aplenty in the recent global crisis.

Given the colossal costs of financial instabilities and crises in terms of human distress and financial losses, financial system stability and risk management in the banking sector is now in foremost regulatory and supervisory focus at all levels, institutional, national and global. Banking sector risk appraisal and management practices are not static, these need to evolve as new product and process innovations in financial services bring up new risk features and risk structures.

The Basle Committee for Bank Supervision (BCBS) based at BIS (an organization of central banks of major economies) in Switzerland is the apex forum drawing up and revising the global best practice standards for banking sector risk appraisal and management, and for supervisory oversight thereof. In this task BCBS teams of experts engage extensively in consultations with industry practitioners, national regulators, and global standard setters in other areas like accounting, auditing and financial reporting. The standards recommended by BCBS are adopted by national level regulatory authorities and industry associations with appropriate modifications to fit the depth and level of sophistication in their domestic financial markets. Following the global financial crisis, plugging of gaps in financial sector regulation and supervision is getting heightened global attention, a new BIS based Financial Stability Board (FSB) is steering the revision processes and putting forward revision proposals for approval of G-20, a new forum of governments of developed (erstwhile G-7) and some larger fast growing developing economies. Basel III revision of the earlier Basel II capital regime for banks recently adopted in this process has brought in new liquidity buffer requirement for protection against liquidity risk. Dependence on external credit rating agencies for appraisal of riskiness of financial assets has also come under review, given the instance of their gross overrating of shoddy assets in the run up to the global financial crisis. Besides the Basel based global initiatives, national level committees/ commissions in major developed economies are reviewing contentious banking risk issues like whether and how to prevent overgrowth of banks to 'too big to fail' dimensions and whether to force separation of retail banking and investment banking to avoid need of publicly funded bail-outs of the latter.

Alongside age-old wisdoms like separation of risk appraisal and financial service marketing functions, the core approach in modern day banking sector risk containment and risk management is to require capital backing


proportionate with precisely assessed riskiness of each and every different investment and business line of a bank. This allows for divergent extents of risk appetite in different banks; but with higher capital requirement for riskier undertakings, the overall risk buildup remains tethered to the extent of capital backing the bank owners are prepared to come up with. Regulators prescribe the minimum standards of risk management (BCBS standards or locally adopted variants thereof) that banks must maintain, these standards typically require active engagement of bank owners (represented by the board) and the senior management in deciding the bank's risk management strategy (risk profile) and in ongoing monitoring of compliance therewith.

Basel I capital regime, the first introduction of risk weighted capital requirements introduced in the 1980 specified risk weights and capital charges only for one main banking risk, credit risk in lending to various borrower segments. This left out such other major risks in banking business like market risks (changes in interest rates, exchange rates, counterparty and settlement risks, price fluctuations in collateral assets, and so forth) and operational risks (breakdowns, disruptions and involuntary or willful lapses in procedural routines, IT risks like identity thefts and so forth). Interim modifications to Basel I and the subsequent Basel II capital regime bridged the gap with specification of risk weights and capital charges for market risks and operational risks. BCBS updating of the best practice standards of risk management has meanwhile continued on an ongoing basis, including issuance of new guidelines for managing risks associated with newly emerging banking business lines. The BCBS guidelines are valuable and important resource materials for banking industry practitioners and regulators at the national level in setting their own versions of the standards suited to their domestic financial market environments.

Besides Basel III liquidity buffer requirement, another notable post-global crisis new trend in banking sector risk management practices is the heightened emphasis on regular stress testing of banks to bring out their vulnerabilities in scenarios of sudden sharp adverse changes in key indicators of market and macro-economic conditions. Vulnerabilities identified in these scenario analyses/simulation exercises are traced backwards to causes including risk management weaknesses.

A cautious supervisory stance on banking sector risk management, in broad conformity with BCBS standards, has served Bangladesh well in preventing large risk buildups that could threaten systemic stability. There have been sparse episodes of risk management weaknesses leading to problems in a few individual banks needing to be sorted out with BB intervention, but none of these posed threat of instability by contagion to other banks and financial institutions. With limited, regulated external exposure keeping the system free of toxic assets, banks in Bangladesh remained healthy with comfortable liquidity and solvency even at the height of the global financial crisis. A 2009 IMF mission stress testing and update of the earlier 2003 FSAP reported several positive developments including in risk management practices in the banking sector since 2003. Recent pressure on liquidity and advance-deposit ratios of a few smaller banks arising mainly from sudden strong turnaround in our external


trade in FY 11 (forty percent plus y-o-y growth surge in first three quarters) and economic activities after a spell in global downturn related slowdown is a transient phase that the market is resiliently adjusting to without any systemic impairment. After the global crisis, BB's supervisory oversight on risk management practices in banks has been strengthened, regular stress testing routines in banks has been made compulsory, Basel-II capital regime has been brought into practice, the likely impact of Basel III capital and liquidity buffer requirement and other revisions of global standards are being studied on an ongoing basis for adoption in due course.

Early in the new millennium, Bangladesh Bank (BB) issued a set of risk management guidelines as the minimum required standards for individual banks. The guidelines covering credit risks and the major market risks were drawn up in BB led initiative by teams of BB staff and risk management practitioners in banks, in line with international best practice standards then prevailing. The guidelines need updating in light of subsequent substantial changes in global best practice standards, and expansion to include adequate treatment of all major areas of operational risks. Because these guidelines are meant for banks, allowing the associations of owners and senior managements of banks (BAB and ABB) to take the updating initiative will be more likely to elicit deeper engagement and stronger sense of ownership of the revision on the part of risk management practitioners in banks. BB staff will of course lend guiding hand, and review the drafts of revised updated guidelines for formal BB approval as required minimum standards.

While risk management practices in the banking sector in Bangladesh have served purpose fairly well in averting systemic crises there is no room for complacence; these practices must improve and develop continuously in step with increasing depth, diversity and sophistication of our financial market and its services. In particular, securitization and derivatives trading necessary for deepening of the secondary and tertiary markets will bring in new challenges in risk appraisal and management; practitioners in banks and supervisory staff in BB will have to acquire the needed knowledge base and expertise.

Global initiatives of reviewing and strengthening of banking sector risk management are progressing satisfactorily, but there are some unsettled key issues on which broad consensus will be important in averting future episodes of global banking crises. These include prevention of overgrowth of banks and financial institutions to 'too big to fail' dimensions posing threat to stability; avoiding the need of publicly funded bank bailouts by forcing separation of retail banking essential for public life from investment banking focused on private gains; and debarring banks and financial institutions from speculative position taking in commodity futures, which fuels price volatility for gains at the expense of consumers.


Bank Supervision*

The recent global financial crisis, debt crisis in Europe, recession and slow growth of the industrially developed countries have uncovered the huge failures of the respective countries in the fields of regulatory and supervisory activities of their financial sectors. Against this backdrop, the issue of systemic risk in the banking sector has acquired the utmost importance in the regulatory agenda all over the world at present. We have much to learn from the recessionary impact, which will equip us for preventing such crisis in future.

In Bangladesh economy with limited, regulated openness in the external sector, the financial system remained free of contagion from toxic assets of the markets in developed economies afflicted by the crisis. In addition, the agriculture sector of our country, as a driver of economic growth has performed relatively quite well in recent times. Our banks don't have derivatives and they don't have subprime mortgages. Their investment in real estate sector has remained low. Yet there are risks and vulnerabilities in our financial sector. We need to strengthen our regulatory and supervisory system so that these risks can be identified well in advance and to ensure best practices in our banks.However, now I would like to mention some of my opinions for the development of regulation and supervision activities of Bangladesh Bank.

The Central Bank will have to enhance its capability and ensure strict supervision and monitoring of the banks for maintaining financial stability of the country. The topmost priority should be given on increasing the effectiveness of supervisory activities. One of the important indicators of financial soundness and stability of banks is their capital adequacy. So, necessary steps must be taken for implementing the policies related to capital adequacy under Basel II and Basel III in the near future. I know that Bangladesh Bank is giving much attention in this area. Yet we need to be more vigilant and increase our supervision and monitoring activities in this regard.

*Town Hall Meeting on Bank Supervision at BBTA, Mirpur, Dhaka, 17 September 2011.


In order to mitigate the risks of banks and to face the possible challenges in the banking sector, suitable guidelines for structured risk management must be developed and put in place. You know that every banking crisis has a different origin. For example, the Savings Bank disaster in the United States in the late 1980s was caused by risky investments in real estate development; the Asian financial crisis in the late 1990s was caused by poor liquidity management; the U.S. financial crisis in 2008, which spread to the rest of the world, was caused by risky lending to the single-family housing market.

As a result, the message for all of us is that banking or financial sector's crisis may occur in any country and any time for many different reasons and we have to remain alert and make ourselves prepared to prevent them. This is why, all kinds of risks-credit risk, liquidity risk, market risk, operational risk etc. must be identified; the depth of risks must be ascertained through analysis; effective ways are to be devised to mitigate the risks and risk-based supervision has to be conducted effectively and efficiently.

In order to support government's rapid poverty reduction program and promote inclusive growth, Bangladesh Bank has been implementing extended financial inclusion activities. Due to the initiatives taken for financial inclusion, credit flow is increasing in the under-served sectors which had been getting less attention including agriculture and in the sectors deprived of financial services like micro and small enterprises, renewable energy etc. To make these initiatives successful and sustainable, there is no alternative to effective risk management, including most importantly the management of credit risk.

We have to take necessary steps to make our prudential regulations in conformity with international best practices and to implement the Basel Core Principles for Effective Banking Supervision (BCBS) fully. In an evolving market environment, we need to prepare ourselves to comply with the post-crisis revised standards (procyclicality of capital and provisioning requirements etc.), which are yet to be published.

There is scope for further improvement in our supervisory process. Existing regulatory weaknesses in the area of bank supervision need to be removed and more emphasis should be given to strengthen our analytical ability (i.e. stress testing, simulation exercise, and risk-based supervision) in examining and verifying the financial health of the banks. We have to ensure that financial statements/reports of the banks are prepared maintaining internationally accepted accounting standards, good corporate governance and efficient risk management systems. The capabilities of the central bank officials have to be developed so that they can evaluate the measures taken by the banks for assessing, managing and mitigating the risks.

Our supervisors always have to adopt a pro-active approach in regulating and supervising the banking sector. Provision of penalties and fines for violation of prudential regulations and irregularities detected through off-site and on-site


supervision have to be strictly enforced. Other sorts of corrective action, such as changing management and upgrading the bank's policies and procedures to address areas of weakness, may sometimes be necessary. To this end, necessary legal reforms may also be undertaken. Our supervisory role has to be increased in preventing money laundering activities and protecting customers' interests. In the meantime a number of initiatives for some regulatory reforms have already been started.

Emerging problem situations have to be detected at the earliest possible stage and brought to the attention of the competent authority so that corrective actions may be taken in time. Specially, high risk sectors need to be intensely monitored. A well-coordinated supervisory system needs to be in place to identify and mitigate these risks. This system cannot be applied selectively to this or that particular bank or financial institution; the strong net of all our supervision must encompass the whole financial sector, without bias in favor of or against any institution. Side by side, we should be more vigilant in protecting customer's interests and rights, including those of poor customers. To this end, our supervisors have to look into the complaints and allegations of customers seriously to identify the problems and give directions to the banks for solving them promptly.

With a view to making the existing supervision system more effective, today's Town Hall meeting has been organized for discussing what other policy measures can be taken, sharing knowledge and experience with each other, improving inter-departmental coordination among the supervision related departments and through this process to work out some ideas/directions for eliminating shortcomings and errors in our system. I hope that embryonic ideas that will come out from today's meeting will help formulate and implement appropriate policies and guidelines thereby maintaining and strengthening stability in the financial sector.

Our bank supervision specialist is present here; you have the privilege of utilizing his knowledge and perspectives, gained from international experience. In addition, you have already got some ideas/opinions on the banking sector of Bangladesh from our well-experienced senior consultants and Deputy Governors. And I believe that their knowledge and experience will be particularly helpful in formulating and implementing policies and guidelines on bank supervision in future.

Bank Supervision: Concluding Remarks

I would like to begin by congratulating all speakers and participants on their excellent presentations and fruitful discussions during this daylong Town Hall meeting on Bank Supervision Activities, held in such magnificent settings. With a view to strengthening the banking supervision activities of a developing economy like ours in the context of the post-financial crisis period of the


developed world, I advocated in my inaugural speech in the morning for a strong monitoring system to maintain capital adequacy, establish an effective risk management system, conduct risk based supervision activities effectively, make prudential regulations in line with international best practices, improve supervisory processes, ensure good corporate governance, increase the capability of the manpower related to supervision activities, take corrective measures timely and increase sufficiency of supervisory methods for protecting customers' interests.

I am sorry for not being present here all the time and not participating in the discussion as I had to attend another important program. But I learned that you participated in the presentations on various issues of risk management specifically liquidity risk management, interest rate risk management, the recent rise in interest rate and its impact, capital market intervention by banks and its linkage with money market, anti-money laundering and other relevant issues and proposed your valuable recommendations.

In this regard, I'd like to say that liquidity risk needs to be kept under constant monitoring. In order to maintain consistency in liquidity management, the formation of larger liquidity buffers should be strongly emphasized. You know that the establishment of credit discipline is an important strategy and instrument for controlling inflation. It is possible to contain inflation by reducing credit growth to a reasonable level against nominal GDP growth. You also know that excessive increases in interest rates hamper economic growth. Interest rates on credit influence the country's savings, investment and GDP growth rate. Thus, our supervisors must make the banks more careful about asset-liability management, perform financial intermediation at the lowest possible cost and disburse more credit to productive and pro-poor sectors. What is more, the money market and the capital market are the two integral parts of our financial sector and the instability of one market affects the other. A coordinated approach and experienced management are indispensable in keeping the country's financial sector stable as a whole. To this end, continuous supervision is needed to bind the banks to follow the rules of the game for investing in the capital market. Thus, continuous supervision and monitoring have to be ensured so that both the markets can help each other within the boundaries of law.

As you know, the two major determinants of the functional efficiency of the financial sector are market structure and the regulatory framework. Financial sector reforms that we have undertaken have encompassed both aspects. The Central Bank has achieved a number of successes during the last two years. The reform programs need to be widened and more intensive. Specifically, during this period of post-global financial crisis, the capacity of Bangladesh Bank needs to be improved in case of crisis prevention and crisis management simultaneously.

I hope that you will adopt the necessary strategies to implement the


outcomes of this Town Hall meeting and put them into practice successively. The great poet Rabindranath Tagore has said, "A pot will contain water according to its size". The quotation is also true for human beings. A man may also be equal to his dream. So you have to dream to be more efficient, and more successful. You have to build up your mind on that approach. You also have to take proper preparations for dreams come true. Today's meeting can be considered as the best way for taking such preparation. We want to make our banking sector digitalized, automated, knowledge-based and customer-focused in the long run. We want to see the sector as the holder and bearer of a dynamic, efficient and resilient financial system. And you have to lead the whole process smartly and competently for materializing our dreams.


Ethics in Banking*

As we all know, Nurul Matin whose name this lecture series commemorates was one of the helmsmen of our central bank and the banking sector in the early years after liberation. To this day the banking community in Bangladesh values highly his impeccably exemplary personal and professional integrity as guiding beacons in pursuit of excellence in ethical banking now and in days to come. This annual lecture event is intended to keep ethical imperatives in forefront of personal ethos of bankers and their institutional goals, objectives and strategies. I am thankful to the BIBM for its leading role in carrying forward this annual lecture series as a part of our banking community's tradition.

On behalf of the banking community in Bangladesh I extend to Professor A.B.M. Mirza Md. Azizul Islam our deep gratitude and heartfelt thanks for presenting us this evening the eleventh lecture in the series. He began his valuable address pleading only peripheral familiarity with literature on ethics and professing an inclination towards the rather limited utilitarian view of ethics; but his intuitions and innate wisdom tempered by the rich trove of his real world experience in national and international civil service (including cabinet level experience steering the Bangladesh economy) has led him unerringly to recommending ethical conduct going well beyond utility maximization into the Rawlsian concerns for justice and fairness in public life, developed further by A. K. Sen, the Nobel Laureate economist and globally acclaimed thinker born in Bangladesh.

In his lecture Professor Mirza Azizul Islam provides us succinct overviews of the traditional and newer dimensions of banking activities, and of the importance of ethical conduct in these activities so as to preserve the trust and reliance reposed on banks by depositors and others engaged in diverse pursuits in the real economy. He illustrates the threats from breach of this trust citing recent episodes of unethical greed driven role of bankers precipitating institutional and market collapses, at times even triggering instability on a global scale. Based on these discussions, Professor Azizul Islam then goes on to

*Eleventh Nurul Matin Memorial Lecture on 'Ethics in Banking', organized by Bangladesh Institute of Bank Management (BIBM) on January 4, 2012.


identify four pillars of ethics in banking and further to a comprehensive set of dos and don'ts defining borders of ethical propriety in banking. The pillars include the obvious requisite of honest institutional behavior with regulatory compliance in true spirit and full truthful, transparent financial disclosures depicting the status of institutional soundness and solvency; fair and equitable treatment of all stakeholders; and socially responsible behavior as corporate citizens. This last onus of socially responsible behavior goes beyond utility maximization, resonating with the urge for justice and fairness in social life and promoting inclusive growth to open up advancement opportunities for the disadvantaged population segments. The ongoing financial inclusion initiative in our banking sector is an action agenda driven by this ethical imperative, underpinned by BB guidance for mainstreaming CSR in corporate goals, objectives and ethos of banks. We are heartened by the warmth of enthusiasm thus far seen in all banks (including the private sector owned ones) in these initiatives, but we still have a long distance to cover in completely ridding our society of poverty and deprivation arising from manifest injustice and unfairness.

Banks are financiers and financial service providers to real sector businesses; this places them in excellent position to be standard setters of ethical practices in real sector businesses, by asking for the same high ethical standards in the borrower businesses that they pursue in their own banks. This means that banks can assume the role of vanguards and standard bearers of ethical practices in the entire business world.

We at BB would urge and support pro-activity of our banking community in doing away with any remaining laxity and ethical lapses in policies and practices of individual banks; collectively pursuing ever better heights of ethical rectitude. I would look forward to the BIBM and individual banks holding periodical discussion sessions for brainstorming on various issues in banking ethics. Training courses for new employees and existing staff of banks should have sessions with adequate content on ethical issues. BB will be happy to be companion and partner of our banking community in the way forward to heights of ethical excellence; and contributions of high profile scholars and thought leaders like this evening lecture of Professor Mirza Azizul Islam will hugely benefit us in this journey now and in future.


*Regional Town Hall Meeting on Bank Supervision, Hotel Agrabad, Chittagong, 18 March 2012.

Bank Supervision*

It is my pleasure to welcome you to the first of the "Regional Town Hall Meetings." As you may know, there was a "Town Hall Meeting" in Dhaka on September 17 of last year, during which I brought together the entire staff from the head office of Bangladesh Bank who are working in the various banking supervision departments. For an entire day, we discussed the condition and performance of the banking sector and some of the initiatives we were undertaking at the time to improve our oversight. Based on the success of that meeting, we decided to have similar meetings in the divisional offices.

I understand that some of you in the divisional offices can sometimes feel disconnected from the changes taking place in the financial sector. All of the scheduled banks are headquartered in Dhaka, along with most of the important conferences, media events, and policy discussions inside and outside of government. Policies are made in the capital and announced from the capital. But we can't forget that a significant number of our fellow citizens live outside the capital city, undertaking a significant share of economic activity. And our banks are here, too, with a significant presence in Chittagong and the other divisions. Of the total loans extended by our banks, about one-third of the funds were extended by branches of banks outside of the Dhaka division. Of those loans, 60 percent were originated in the Chittagong area.

Deposits are also substantial outside the Dhaka division. About 36 percent of depositors' funds in Bangladesh are located at bank branches outside of Dhaka. Of these, 56 percent are deposits gathered from your families, friends, and neighbors in the Chittagong area. So in both lending and deposit-taking, banks that have a presence in the Chittagong area contribute significantly to the national totals. In other words, the bank branches that you inspect throughout the year are responsible for about 20 percent of the growing banking market in Bangladesh. That makes your job, in promoting banking excellence and integrity at these branches, extremely important.


But I want to step back from the local level for a moment, and talk about promoting banking excellence and integrity at the national level. As you all know, financial markets all over the world are undergoing dramatic change.

The global financial crisis, debt crisis in Europe, and recession and slow growth in much of the industrialized world have necessitated sweeping reforms in the manner in which banks are supervised, and in which bank failures are handled.

Banks in Bangladesh escaped the turmoil of the past several years. But this does not mean that we can ignore the reforms taking place in the rest of the world. In fact, we have to speed up the reform process. We must put in place additional safeguards that will help to prevent a local or national banking crisis from developing in Bangladesh. We are a country of modest means, and we simply can't afford to deal with the consequences of any banking crisis. We have to be alert and resourceful in doing whatever we can to avoid that painful outcome. Every banking crisis has a different origin. The savings bank disaster in the United States in the late 1980s was caused by risky investments in real estate development. The Asian financial crisis in the late 1990s was caused by poor liquidity management. The U.S. meltdown of the last decade, from which nearly the entire industrialized world is still recovering, was caused by risky lending to the single-family housing market-which was used to be thought of as the safest kind of private-sector loan. Now, in Europe, even government debt is viewed as risky and a threat to the solvency of many large banks. High and rising levels of government debt, relative to GDP, has called into question the ability of several Euro-zone countries to pay the interest on these debts without undertaking massive structural reforms and painful budget cuts. Greece is about to default on part of its debt, directly harming the capital and profitability of a great many of Europe's leading banks.

In short, banking has changed and as banking regulators we must also change. The old assumptions, old certainties, old procedures just aren't sufficient anymore. There are risks and vulnerabilities in our own banking sector and we have to work harder and work smarter to uncover these risks and promote best practices in our banks. This is what we mean by promoting banking excellence. Above all, best practices mean sound judgment in the granting of credit, lending to legitimate borrowers who have the ability and the intent to repay. Best practices also mean diligent monitoring of all credits through their life cycles. Banks have to maintain an internal risk-rating system for all borrowers and monitor their ability and willingness to repay constantly. And they have to make provision for expected loan losses when doubts arise that the borrower will pay back the loan.

Best practices also mean the prudent management of other risks in addition to credit risk- especially liquidity risk and the market risk arising from direct or indirect investment in shares. Best practices also mean an efficient, secure IT architecture that generates appropriate financial statements and management information reports, prevents the maintenance of separate, fraudulent books


and records, and guards against data security breaches. Above all, best practices mean effective corporate governance, including a corporate culture that stresses compliance, respects internal audit, and implements strong internal controls. All of these best practices are the responsibility of bank management. As regulators, we must evaluate their performance, and make them take corrective action if there are deficiencies. This is what we mean when we say "promoting banking integrity." Integrity in banking means making sure that the shareholders, directors, executive officers, and indeed all staff are honest and trustworthy individuals who will follow the laws and regulations, and implement best practices. You, in the Chittagong office, are an integral part of our efforts to promote banking integrity in Bangladesh.

How can you help? When you are visiting a bank branch as part of an inspection team, pay close attention to the branch management. Talk to them, listen to them, ask them questions. Assess their qualifications and assess their character. Listen to the branch staff. In many cases, information about illegal or unethical activity taking place at a bank branch comes from lower-level employees. If you see something that looks wrong, in the loan files or anywhere at the branch, say something. Tell your supervisor. Very often, illegal or unethical conduct by branch managers or staff is indicative of the same kind of conduct at the head office.

As 2012 progresses, I expect to see many changes and improvements in the manner in which we conduct banking supervision in Bangladesh. We will constantly be more and more focused on risk, and less on routine tasks. Because most of you are involved in the on-site inspection process, you'll be particularly interested in the changes we have planned in on-site supervision. As you probably know, the on-site inspections take too long, from the time the inspectors arrive in the bank until the time that the report of inspection is written, approved, and sent to the bank's Board of Directors. As a result, the findings and conclusions given to the bank, and used by us in requiring corrective action, may be based on out-of-date information. We are seeking to reduce that time significantly through changes in the manner in which staffs are allocated and deployed, and the elimination of routine tasks that do not directly address current and emerging risks. In that way, we can demand that problems be addressed through corrective action at an earlier stage, before they threaten the solvency or liquidity of the bank.

We will also make more thorough the evaluation of corporate governance, internal audit, and risk management. Bank management will be held to higher standards of performance. It is not the responsibility of Bangladesh Bank to manage each and every bank. It is the responsibility of the Board of Directors and executive management. They must adopt and implement appropriate policies and procedures to govern the bank and identify, measure, monitor, and control all risks. The most important of these risks are credit risk, market risk (including interest-rate risk and foreign exchange risk), operational risk (including the risks of internal and external fraud), and liquidity risk. And it is the responsibility of the bank's own Internal Audit function to evaluate how the


internal controls are working. In turn, we must evaluate how well internal audit handles that task.

We also expect to improve our legal and regulatory framework this year. We will adjust our policies on loan classification and provisioning to more closely reflect international practice. Provisions should reflect all expected losses in the loan portfolio, arising from an inability or unwillingness of the borrower to repay. This initiative directly affects your work, because in reviewing the loan portfolios at the branches you are reviewing the banks' classification of their own loans. If these classifications are not accurate, provisioning will not be accurate. With more accurate provisioning, the capital of each bank will be more accurately measured. And capital is the single most important indicator of a bank's condition, so we have to know more precisely how much capital the bank has, and how much capital the bank needs.

We will also upgrade our measuring and monitoring of banks' liquidity. Liquidity risk management is the responsibility of every bank, and we will be evaluating more closely on-site whether they are doing all that is necessary. We are in the process of introducing new measures of liquidity - the liquidity coverage ratio and net stable funds ratio - and are gathering data from the banks now and analyzing those data. As soon as we know that banks are comfortable in submitting accurate data for these indicators, we will make them regulatory requirements.

During the period of post-financial crisis, it becomes necessary for us to perform extended responsibilities in the areas of both systemic oversight and on-site supervision of the central bank to protect the financial sector from any threat or crisis.

To conduct intensive supervision is also essential to mitigate the risks involved in those new activities and areas which we have identified for achieving inclusive growth. To this end, we want to upgrade the standard and quality of our supervision to a level where people's confidence and trust on us will be established. In order to redress grievances and complaints relating to banks and finance received from the customers, we have already opened Customers' Interest Protection Centre (CIPC) at our Head Office and Branch Offices.

Today you will get much more information on how the banking sector as a whole is performing, and what you should look for at the branch level. We all have to play our role to promote banking excellence and to protect the interests of the depositors i.e. your family, friends, and your neighbors in Chittagong region and throughout the country. You have to inspect more closely the sanctioning process of the credit disbursement, utilization and recovery of the credit by the bank branches. And you have to check whether the bank branches are classifying their loans and advances and making provision against them properly, whether Loan against Trust Receipt (LTR) are being disbursed/created wisely and cautiously, whether liquidity risk of the bank is increased due to turning of this loan into term loan which takes longer time to be repaid than


originally scheduled. It is your responsibility to ensure the implementation of the policies, directions and guidelines of the central bank at branch level. I hope that you will pay much attention to all these issues.

Finally, I would like to say a few words on the current macro-economic situation in our country. You are aware that at present our foreign exchange market is stable mainly as a result of reduced outflows of import payments. On the other hand, export growth is also encouraging. With the growth of remittances above 12 percent, we are projecting record level of remittance inflows by the end of current fiscal. In contrast, we hope that inflation will also return at declining rate very soon in consequence of tactful implementation of monetary policy.If we can maintain present co-ordination between the fiscal policy and the monetary policy, we are hopeful of coming down of inflation at a comfortable 'single digit' by the end of current fiscal.


Bankers' Meeting*

I wish to make some introductory remarks on the current banking scene. Our banking sector has been doing quite well even in the backdrop of ongoing global economic slowdown in the aftermath of the global financial crisis. Risk weighted 11.31 percent capital of our banking sector exceeds the Basel II regulatory requirement of 10.0 percent. Classified loans of the banking sector stand at 7.17 percent. Imbalance between deposit and lending growth rates prevailing last year has now been corrected, with deposit and lending growth rates at 20.7 and 19.72 percent respectively according to recent figures. Advances- deposits ratio (ADR) now stands at 79.83 percent. Results of the latest round of stress testing are reassuring, assessing the banking system as at moderate level of resilience. Alert attention of BB's monetary and credit policies towards adequacy of financing flows to productive sectors resulted in private sector getting healthy credit growth of 19.7 percent in FY 12, higher than the 18.7 percent public sector credit growth; with satisfactory growth in credit flows to agriculture and SMEs. Alongside these, inflation has been turned around to declining trend, with point to point CPI inflation already back in single-digit, facilitating faster stabilization of market interest rate at moderate levels.

Some recent incidents of fraudulent lending in huge amounts resulting from serious lapses in corporate governance and lending discipline in some bank branches have however cast sullying shadows on the satisfactory overall picture of our banking industry. Though detection of the rapidly swelling fraudulent lending activity in a relatively smaller branch outside BB's annual inspection routine took a while, BB's supervision departments tracked it down following up from the bank branch's inability to honor its accepted bills; directing the bank concerned to conduct thorough investigation. You are aware of the immediate and longer term curative and preventive steps taken up by BB in the matter and I don't intend to elaborate upon those here. What I wish to point out to you here is that prevention as well as detection of fraudulent activities is primarily the responsibility of the concerned banks themselves, though BB has already taken steps towards also creating its own task force for the purpose. The amount involved in this detected incident of fraudulent lending is large, but

*Bankers' Meeting at Bangladesh Bank on September 13, 2012.


not such as to raise scare of jeopardy for continued normal operation of the bank concerned. As usual, BB has been extending necessary support for smooth and orderly operation of financial markets; and local money and exchange markets have remained completely normal and stable.

To continue on progress path of financial markets development with stability, it behooves on you as CEOs to pay utmost alert attention towards ensuring good corporate governance, risk management, internal audit and internal control functions in your respective banks. Much as fraudulence in lending and other financial activities are extremely undesirable, these are not altogether preventable; examples of such incidents are not rare even in developed country market environments. In this context, the criteria for holding banks responsible for fraudulent incidents will be the degree of alertness of their own internal audit and internal control functions in detecting and preventing fraudulent activities. BB will bear down harder on banks of which the boards and senior managements display laxity in this respect. I would urge you all to bear this in mind, and thus to strengthen and maintain utmost alertness in lending discipline, internal audit and internal controls; taking appropriate disciplinary and legal criminal proceedings immediately as any fraudulent activity is detected.


Financial Stability Report 2011*

Publishing the Financial Stability Report on a periodic interval is one way through which Bangladesh Bank conveys its assessment about financial stability.

Simply put, Bangladesh Bank defines financial stability as the resilience of the financial system to unanticipated adverse shocks, which enables continued smooth functioning of the financial intermediation process. Even though advanced countries suffered a lot after the global financial turmoil, Bangladesh's financial system, overall, remained sound and resilient throughout the year 2011. The banking sector's activities, as a percentage of GDP, were on a rising trend, and key financial soundness indicators of the banks recorded an improving trend. The capital market, though, suffered from unusual turbulence; however, various incentives from the government were put in place to boost up the market and restore public confidence thereon. The insurance sector was brought under a new regulatory framework.

Maintaining financial stability is one of the key mandates of Bangladesh Bank. To this end, Bangladesh Bank employs a variety of measures. FSR 2011 outlines the major trends in the banking industry and the non-bank financial institutions sector of Bangladesh with respect to their impact on financial stability. It also highlights developments in other segments of the financial system namely, the capital market and insurance sectors. Furthermore, through the report, Bangladesh Bank reveals its evaluations of financial stability as well as risks and fragilities in the financial system.

A number of steps have been taken by Bangladesh Bank in the recent past having their notable linkages to the financial stability of Bangladesh. Some important ones are: issuing the revised Risk Management Guidelines for Banks and Stress Testing Guidelines for NBFIs, publishing the Financial Stability Report 2010, creating the Financial Stability Department and the Deposit Insurance Department, completing preparatory works for implementation of the Financial Projections Model, initiating implementation of two of the Basel III liquidity framework metrics with a view to addressing systemic risks and enhancing

*Unveiling event of the Financial Stability Report 2011, Bangladesh Bank on 7 October, 2012.


resilience of the financial system, adjusting the guidelines on classification, provisioning, and rescheduling so that financial statements better reflect expected losses, and creating the Financial Integrity and Customer Service Department Besides, a "Customer Interest Protection Centre" has been created in the Head Office and branch offices of Bangladesh Bank to address customer complaints about banking services. Bangladesh Bank is also committed to putting in place a regime of macro-prudential supervision and the most relevant tools and practices available to meet the needs of our growing economy and financial sector.

With increased globalization of financial markets as well as growing inter-connectedness of the global financial system, any adverse development in the foreign markets may result in financial instability in our country as well, which may in turn jeopardize sustainable growth and price stability of the country. Such apprehension almost inevitably compels Bangladesh Bank and the government to pay utmost attention to the monitoring of structural and macroeconomic developments. Bangladesh Bank is giving emphasis to crisis preparedness before crises actually arise. We are also watchful about what advanced as well as peer financial systems are resorting to for addressing systemic risks and withstanding the crises if they should arise. To shield the banking and NBFI sectors from risks and vulnerabilities, reasonable emphases are being given to both on-site supervision and off-site surveillance. However, efforts from central banks alone will not be fruitful if effective implementation of prudential rules and regulation are not properly ensured by scheduled banks, non-bank financial institutions, and regulators of other financial intermediaries. As banks are the hub of the financial intermediation process, it is an important responsibility for banking sector executives to retain public confidence in the banking system.

Let me take the opportunity to urge the CEOs of the banking industry, present here, to ensure effective implementation of, and compliance with, prudential regulations and supervisory instructions of Bangladesh Bank aimed at protecting systemic crises. These regulations and instructions will be rolled out in the coming months. But do not be concerned that the sector will become "over-regulated." Regulations promoting stability of the sector as a whole will be complementary to regulations promoting the stability of individual institutions. They are not in conflict, nor are they intended to create an undue burden. As Managing Directors of banks and financial institutions, you should understand that the legal and regulatory framework - in particular, expectations for risk management, minimum capital and liquidity requirements, large exposure limitations, and conservative accounting and reporting requirements including recognition of expected losses - are best banking practices. They are measures that should be taken anyway, whether they are mandatory or not.

But allow me to make one point very, very clear: Bangladesh Bank will not allow imbalances and excessive linkages to build up in the banking sector as they did in some parts of the developed world. We are monitoring the rate of credit growth at individual institutions and in the sector as a whole. We will not permit banks to become too tightly woven together with excessive interbank


lending, borrowing, depositing, and debt and equity ownership. We will continue to insist that loan underwriting be based on cash flow and not on rising real estate values that are unverifiable and easily reversible. These measures are entirely consistent with a sound monetary policy that aims to keep inflation down to levels that do not create hardship for our citizens, many of whom are of modest means, while providing the enabling environment for broad-based, sustainable growth.

I hope our analyses and assessments will help creating risk awareness among the stakeholders of the financial system as well as enable them prepare for and adapt to possible shocks, whatever be their natures--endogenous or exogenous.


Effective Banking Supervision*

The theme of town hall meeting 'Financial Integrity: Managing Operational Risks and Avoiding Serious Losses at the Branch Level'is chosen in order to focus on institutional and systemic risks involved in bank credit and other business activities as well as to strengthen corporate governance and internal control process of the banks through enhancing effectiveness of Bangladesh Bank (BB) supervision activities.

We have undertaken various reformative and redesigned actions for the financial sector supervision framework of BB. By organizing town hall meetings at the head office as well as at the regional level, with a view to energizing and encouraging supervision activity, we have instituted quick inspection and formulation of a review report on activities and various issues of financial statement analysis of the banks, and we have also made two separate departments out of the previous Foreign Exchange Inspection and Vigilance Department. Recently,establishment of an Electronic Dash Board is also going on in order to identify the trends that might indicate irregularities and fraudulence from the data/information of the financial statements of the banks collected by our supervision departments. Proper directions have been given to the banks to submit all information regarding export-import including Inland Bill Purchase (IBP) on-line to BB, as well as to adopt IT-based system. The IT Department of BB has also undertaken initiatives to prepare suitable software. We have also issued a guideline to submit self-appraisal on effectiveness of their adopted internal control system having the signature of Chief Executive Officer and the Chairman of the Audit Committee of Board of Directors on quarterly basis to BB in order to prevent fraud/swindle in the banks.

Re-organization of key functions of the inspection and supervision departments of BB is also going on in light of recommendations of a conference held with the participation of the General Managers and Executive Directors of Bangladesh Bank to sharpen the effectiveness of financial sector supervision. Emphasis is also given on special on-site inspection by giving importance to bank activities that have more risks. On-site inspection of the

* Regional Town Hall meeting of Bangladesh Bank officials held at Khulna on 11 November, 2012.


branches is conducted combinedly on the basis of probable weaknesses identified through analysis and review of the data/information received by the Department of Off-site Supervision. BB has appointed an expert as consultant to strengthen the skill of our inspection and supervision departments in identifying and preventing the trend of fraud/misconduct of the banks. He will find out the limitations/weakness after reviewing the functions of the concerned departments of BB and provide recommendations regarding actions to be taken along with training to the BB staff. He will also share some preliminary ideas to you in this regard in today's Town Hall meeting. In addition, Mr. Glenn Tasky, an international expert in bank supervision and our senior consultant Mr. Md. Allah Malik Kazemi will participate in the discussion session and give necessary guidelines after detailed discussion by our Deputy Governors.

In Khulna and Barisal divisions, there are more than 1,200 branches of the scheduled banks which is 15 percent of the total branches in Bangladesh. Overall, these branches manage about Tk. 200 billion as loans and advances and about Tk. 260 billion as deposits, which represents only 6 percent of the total activity in the banking sector. Although the volume seems to be small, you must keep in mind that these deposits belong to your local community, it is your responsibility to review whether these branches are following the right procedures in protecting customer's interest and whether the major portion of loans are disbursed to local people. You have to verify whether the borrowers on bank`s book really exist or not, or whether the bank is trying to hide its illegal activities by applying your own wisdom and knowledge. Lack of attention from the head office due to fewer transactions and geographical distance, few face-to-face meetings between branch managers and executive management of Dhaka and other factors may expose these branches to a risk of internal and external fraud-forgery. Thus, we have to keep vigilant eye on it.

You must hold the banks responsible of a serious violation of the rules if they don't preserve original documents of a loan. Because to hide information in documents/file for malafide intention, not preserving necessary documents indicate red signal of possible fraud-forgery, internal irregularities or mismanagement in credit procedures i.e. financial manipulation. Electronic copies instead of original documents of loan are not acceptable. This is because there is no guarantee that the electronic copies are exactly the same as the originals or that the originals have all the required disclosures and signatures and additionally, the bank's computer may not track the documents of the newly opened file. If a particular employee selected by the branch manager who remains frequently absent, then you must ask him to submit the documents within a reasonable time.

As we proceed with today's program, you will know about what is taking place in the banking sector as a whole and you will hear about some of the initiatives that have been undertaken to improve the banking supervision. I would like to emphasize that you will observe a lot of change in on-site inspection to transform our banking sector into an efficient and effective model system. Recently, some policies and guidelines have been issued, a few of them are completely new and the rest are amended.


Although fraudulence in the financial sector is absolutely undesirable, these are not totally preventable; the instance of such occurrence in developed countries is not unusual. But supervision activities of BB in corporate governance, internal audit and internal controls, and external audit - the main lines of defense against fraud and supervision of the banks in lowering the risk of these incidences must be strict in order to discourage repetition of such fraudulence. Under this circumstance, I want to say that in order to strengthen our monitoring system over banking sector we may take initiative not on the basis of macro-economic alarming situation rather we can comfortably take it.

Even in the backdrop of ongoing global economic slowdown in the aftermath of the global financial crisis in the era of post global recession, the banking sector of Bangladesh stands in a sound position. Although banks are obligated to maintain minimum capital at 10% of the total risk weighted assets according to the Basel -II accord on capital adequacy, they have been able to maintain capital at higher ratio (11.31%). The percentage of classified loans in banking sector now sets at 7.17% as gross statistics while it is only 2% as net statistics. The inconsistency between the growth of deposits and loans prevailing last year observed only a year ago is now almost eradicated with deposit and lending growth rates at 20.33 and 18.52 percent respectively according to recent figures. Advances-deposits ratio (ADR) now stands at 78.91 percent. Results of the latest round of stress testing are reassuring, assessing the banking system as at moderate level of resilience. Attention of BB's monetary and credit policies towards adequacy of financing flows to productive sectors resulted in private sector getting healthy credit growth of 19.9 percent up to August, 2012, higher than the 19.2 percent public sector credit growth; with satisfactory growth in credit flows to agriculture and SMEs. Alongside these, inflation has been turned around to declining trend, with point to point CPI inflation already back in single digits, facilitating faster stabilization of market interest rate at moderate levels. In October, 2012, our foreign exchange reserve has exceeded US $12 billion for the first time. Now liquidity and exchange rate in inter-bank money market and foreign exchange market is quite stable. BB's various types of incentives and campaign as well as stable price of Taka contributes to this success.


Combating Terror Financing*

We are all well aware that combating financing of terrorism is now a high priority issue globally as well as for us in the BIMSTEC countries, and regional meetings like this are important forums for sharing of ideas and for learning from each other's experiences. Such meetings are also very useful in forging and deepening mutual cooperation, something particularly important for effective surveillance on cross border flows of suspect funds. I understand that this subgroup meeting will focus especially on combating financing of terrorism by wire transfer. I see this as a very aptly chosen topical theme, because internal and cross border fund flows through wire transfer are growing very fast, enabled by increasing ease of access to internet, smartcard and mobile phone based technology. High speed and frequency of the wire transfers bring in new surveillance challenges for the regulatory authorities to address.

As elsewhere in the BIMSTEC region, wire transfers of funds have been growing rapidly in Bangladesh, enabled by buildup of necessary IT infrastructure and countrywide connectivity backbone with proactive support and guidance of Bangladesh Bank. An interbank electronic fund transfer network facilitates diverse internet, smart card and mobile phone based fund transfer arrangements, with connectivity support across platforms available in a National Payments Switch. FIU at Bangladesh Bank has already installed go AML software to monitor more effectively all STRs and CTRs.

Bangladesh has all along been treating Anti Money Laundering/Anti Terrorism Financing (AML/ATF) concerns with due seriousness. A founder member of the APG, Bangladesh was the first South Asian country to legislate a Money Laundering Prevention Act in 2002; the Anti Terrorism Ordinance was promulgated in 2008. Both these statutes have undergone subsequent amendments, lastly in 2012. As you will know from Bangladesh country presentations in the working sessions, the FIU of Bangladesh Bank has remained alert and proactive in putting in place appropriate Anti Money Laundering/Anti Terrorism Financing (AML/ATF) safeguards on wire transfers of

* Inaugural address in the 5th BIMSTEC Sub group meeting on 'Combating Financing of Terrorism' , 6 March 2013


funds, in line with FATF Special Recommendation VII of 2001 and revised FATF Recommendation 16 of 2012.

I hope that the participating country delegations will engage earnestly in the working session discussions to benefit handsomely from sharing of experiences and ideas, raising issues from own experiences and looking for new ideas on better approaches. In particular I would like to emphasize on the inter-agency cooperation within a country. Mutual cooperation and information sharing MOUs already exist between FIUs of some of the BIMSTEC countries, this meeting can usefully bring up suggestions on how to hasten signing of such MOUs between the remaining FIUs. This would be an important first step in forging and deepening cross border cooperation, bilaterally as well as in a possible new multilateral BIMSTEC sub regional network.


Asset Recovery Initiatives*

I am very glad that ACC has arranged this first ever multi agency training program in Bangladesh for staff members from BFIU, law enforcement, adjudicating and other concerned agencies on the complex, challenging subject of recovery and bringing back of proceeds of corruption. This is a relatively new area even in the global scene. Episodes of massive covert funneling abroad of funds wrongfully acquired by corrupt regimes became commonplace over the past few decades, eliciting the global community's response of concerted recovery initiatives, guided by the UNCAC principles. The processes involved in asset recovery are necessarily complex, since the assets to be recovered are located in different jurisdictions under different legal systems with varying degrees of access to appropriate legal services.

Successfully tracking down the stolen assets through the trails of transfer require close interagency cooperation within the source countries, effective cross border cooperation between FIUs of different jurisdictions on the transfer trails of the funds, and help from international agencies like the Interpol. After ascertaining the locations of the assets to be recovered, different legal methods like criminal confiscation, civil forfeiture, non-conviction based recovery may be needed under various situations in different jurisdictions. Regulators, investigating law enforcement agencies, and adjudicators need a holistic understanding of the entire sequence of the processes involved. This multi agency training initiative drawing upon an appropriately diverse mix of resource persons from home and abroad is therefore very timely, for which I heartily congratulate the ACC. I expect this training program to be a very enriching experience for the participants interactively learning from the resource persons, and also learning from each other's experiences in networking contacts and communications between themselves.

It is gratifying that Bangladesh's asset recovery initiatives are well in step with global efforts, as part of our overarching AML CFT initiatives guided by the National Coordination Committee chaired by our today's Chief Guest the

*Inaugural session of the Multi Agency Asset Recovery Training Program August 26, 2013, Ruposhi Bangla, Dhaka.


honorable Finance Minister. Asset recovery initiatives in Bangladesh are being overseen by an inter agency committee headed by the Attorney General and assisted by the BFIU. Besides enacting amendments updating the AML CFT statutes in line with UN conventions and other global best practices, our Government has also enacted in 2011 a statute indemnifying disclosure of information in the public interest, protecting interalia the whistle blowers about corrupt practices in public institutions. At the Bangladesh Bank, BFIU's manpower skills and physical facilities have undergone major upgrading, in addition to introduction of UN supported goAML software and the Mutual Legal Assistance in Criminal Matters Act 2012 has facilitated BFIU's signing of mutual assistance MOUs with FIUs in other jurisdictions.

Empowerment and strengthening of BFIU in this manner has helped it recently secure membership of Egmont Group, enhancing its effectiveness with stronger cross border ties with 139 other member FIUs in the Group. The interagency Asset Recovery Committee headed by the Attorney General of Bangladesh already has one success story in its bag, a milestone event. We look forward to continuing effective, even handed use of the asset recovery processes by our successive democratically elected governments in firmly rooting rule of law and corruption free good governance so much aspired for by the electorate. I wish the very best success for this ACC sponsored multi agency training initiative, and I extend the assurance of ready willingness of our BFIU in joining cooperation engagements in all such initiatives with the ACC and the other law enforcement and adjudicating bodies.


Implementing the Provisions of UNSCR*

It's my honored privilege to speak in front of this expert group on anti money laundering and combating financing of terrorism. I would like to limit my speech to share the progress made so far on anti money laundering and combating financing of terrorism in Bangladesh and specifically the steps taken to implement the provisions of UNSCRs. Combating money laundering and terrorist financing needs a concerted effort from all the relevant agencies. This is even more relevant for proper implementation of UNSCRs. The provisions of United Nations Security Council Resolutions (UNSCRs) on targeted financial sanction are not something new. It was started in 1999 with the adoption of United Nations Security Council Resolution 1267 against Al-Qaida under the authority of Chapter VII of the Charter of the United Nations. Consequently, some other resolutions like 1373 for listing individual and entities of any jurisdiction on its own motion, 1718 for prevention, suppression and disruption of proliferation of weapons of mass destructions and its financing and their successor resolutions were adopted under the same authority. You may be aware of the fact that the resolution adopted under Chapter VII of the Charter of the United Nations is mandatory for implementation for all jurisdictions. UN Security Council has every right to compel any jurisdiction to implement the provisions of UNSCRs.

Bangladesh has been complying the requirements of the UNSCR since the inception of FIU in Bangladesh Bank through issuance of Circular Letter to the Reporting Organizations but with the changes of FATF recommendations in February, 2012, especially through the inclusion of recommendation 7 relating to the prevention, suppression and disruption of proliferation of weapons of mass destructions and its financing and the adoption of successor resolutions of 1267 made the coverage satisfactory wider. Now the compliance requirements under those provisions of UNSCRs are not limited to only with the financial matters but also include restrictions of entry into or transit through Bangladesh of listed individuals and entities, restrictions of supply, sale or transfer of arms and ammunition, prevention of illicit trafficking in nuclear chemical or biological weapons, denying permission for any aircraft owned or

* Inaugural address at the workshop on "Implementing the Provsions of UNSCR" held at Bangladesh Bank on.


leased by listed person or entity to take off or land in Bangladesh and so on.

The Bangladesh Government is strongly committed to the effective implementation of UNSCR 1267 and its follow-up resolutions. This is reflected in a series of concrete actions already taken by Bangladesh. Let me cite some of these actions.

J Issuance of an SRO on 29th November, 2012 under section 2 of the United Nations (Security Council) Act, 1948 and amendment of the SRO on 18 June, 2013 to make comprehensive implementation mechanism.

J Formation of a National Committee to oversee the implementation of the mechanism.

J Amendment of the Anti Terrorism Act in 2012 and again in 2013, aiming to meet all the requirements of international standards.

J Inclusion of the provisions of UNSCRs in the Anti Terrorism (Amendment) Act, 2013 considering the enforceability.

J Inclusion of a separate chapter to make provisions to implement the requirements of UNSCRs.

J Finally, the draft of Anti Money Laundering rules has been prepared under section 43 of ATA which is going to be issued soon.

All these actions show strong commitment of Bangladesh Government towards implementing the UNSCRs. Our Honorable Prime Minister also declared "ZERO TOLERANCE" against terrorism and terrorist financing. Apart from the implementation of the provisions of UNSCRs, Bangladesh has made remarkable progress in the last three years to upgrade its AML/CFT regime. Some actions taken can be cited here;

J Formation of a National Coordination Committee headed by Honorable Finance Minister for formulation of AML/CFT policies.

J Formation of a working committee headed by the Secretary, Bank and Financial Institution Division, Ministry of Finance consisting of all stakeholders as member.

J Completion of the assessment of National ML/TF risk and vulnerabilities.

J Development of National AML/CFT strategy for 2011-2013 to comply with the UN Conventions and Resolutions and to mitigate the identified risk and vulnerabilities.

J Accession to Palermo Convention.

J Enactment of Money Laundering Prevention Act in 2012 repealing MLPA, 2009 to strengthen the AML/CFT regime of Bangladesh and to meet the international standards.

J Enactment of Mutual Legal Assistance on Criminal Matter Act, 2012 *to facilitate better international cooperation regarding ML/TF and related offences.


J Amendment of Extradition Act, 1974 to incorporate money laundering and terrorist financing as scheduled offence.

J Issuance of Mutual Legal Assistance Rules on 08 September, 2013 to ease the procedure of international cooperation.

J Issuance of AML/CFT Guidance Notes for Insurance Companies, Money Changers, Financial Institutions, and Capital Market Intermediaries by BFIU.

Considering the above mentioned development APG has upgraded our previous rating against 14 FATF core and key recommendations out of 16. On 03 July BFIU has been awarded the Egmont Group membership. Now Bangladesh is also expecting that it will come out of the ICRG (International Cooperation and Review Group) process soon. Our focuses here today are compliance requirements under UNSCRs related to terrorist financing and proliferation financing of weapons of mass destructions, International Obligations and Scenario in relation to UNSCRs on terrorist financing and proliferation financing and the role of UN sanctions committees, legal and institutional framework to combat terrorist financing and proliferation financing of weapons of mass destructions, implementation procedure and mechanism and the role of inter agency cooperation,. I hope we will get opportunity to discuss more about these issues to learn from exchanging experience and expertise and also will be able to map our future course of action. Macroeconomic fundamentals are pretty strong. All indicators are positive. We need to create good image of the country, so that FDI will increase.

To implement the provisions of UNSCRs is in a way a collective responsibility of the National Committee which comprises members from different ministries and organizations. So an efficient as well as effective coordination mechanism is very much required. And we all have to work hand in hand to establish that mechanism. Ministry of Foreign Affairs has done an excellent job coordinating with all the relevant stakeholders. I would like to thank Hounorable Foreign Minister for making time to grace this workshop as the Chief Guest. Excellencies, distinguished participants, guests, I very much look forward to a successful workshop with some specific products and recommendation. I want to conclude here with gratitude to you all for your patient hearing.

Thank you.


*Launching of Financial Access Map in Bangladesh 26 October 2013, A.K.N. Ahmed Auditoriam,BBTA, Mirpur, Dhaka

Financial Mapping Tool for Policy Decisions*

It is my great pleasure and privilege afternoon to speak at the launch of this Financial Access digital map. A wise saying goes that there is no alternative to knowledge. This is even more relevant when we are embarking upon deeper knowledge economy. Using geographic information systems (GIS) analysis to assess the spatial distribution of bank branches, ATMs, mobile money, agents, and other financial access points we can generate analysis that can be of great operational value to the commercial sector, the public sector, and for guiding regulatory policy.

It is this type of practical tool which is essential to generate, disseminate and use knowledge for finance and development. I see our role as a Central Bank as fundamental in creating this type of public good and as Chair of MRA I also see this as a role for the micro-finance regulator. I, therefore, would like to thank Gates Foundation wholeheartedly for sponsoring this exercise. This will certainly go a long way in enhancing our drive for greater financial inclusion.

There are many other initiatives which relate to the concept of a digital Bangladesh Bank which have taken off the last few years. This includes initiatives to spur e-commerce including modernization of the country's payments system and financial sector IT infrastructure including online clearing and settlement of interbank paper based and electronic fund transfers, online credit information bureau, the National Payments Switch, mobile financial services and so forth. These new tools can complement our new Integrated Supervision System which is our new electronic portal which allows us to monitor many aspects of the financial sector both at the aggregate macro level as well as zoom into branch level data.

It is critical that this new financial mapping tool is used by both BB and MRA in making balanced and sound policy and regulatory decisions. For example BB staff can use this when giving bank branch permissions and also when determining the appropriate balance of branch, ATM, agent, local post office and other point of service. It can also use this to direct greater efforts at financial inclusion in certain geographical areas of the country. For instance, we may use it to reward banks who extend agricultural or SME credit in the more underserved areas. As the institution responsible for safe and sound financial sector


performance, this new tool leverages the rapid evolution of digital technologies that will help BB fulfill its dual goals of financial inclusion and sound performance.

One important contribution of this map is that the current standard access measure in the financial inclusion world has been a crude density measure (for example, branches per capita or ATMs per 100,000 people). A more precise approach to measuring access in a standardized way is to use true proximity measures such as % of (poor) people within say 5km of a bank branch or agent point.

Using this standard metric, BB and other government agencies can prioritize regions (and more granular administrative units) by level of access. Moreover as was mentioned about the BBS poverty map we know that GIS analysis can generate a very high-resolution map of where poor people live. By overlaying the coordinates of various financial access points, safety net programs can now assess the most effective method of money transfer to the poor.

This tool can also help in day to day liquidity management. By adding mobile money agent activity data to the map, GIS analysis can comprehensively identify those agents that are both far from a bank branch and ATM and likely to face cash short-falls (e.g. cash-out-heavy rural agents). With an understanding of where liquidity issues are likely to manifest themselves, mobile money deployments can proactively build liquidity management infrastructure where it is needed most. This can be useful for doing comperative research as well. Status of financial inclusion compared to other countries. Our researchers at BB should mine this open data and come up with interesting research papers which can help us take smart regulatory decisions. In addition this should be used as a teaching tool both in BBTA and BIBM. A desirable course on financial inclusion can be designed by both the institution based on this dynamic map based data set.

Finally, we all agree that this map needs to be updated regularly. As such we have decided to make our Financial Inclusion group within BB the focal point of this updating. We will request all of your cooperation in this and we will work with MRA in obtaining the required information of when new branches or agents are set up so that we can enter it into the digital map.

PART THREEFinancial Inclusion, Mobile Banking,

Sharecropping, Agricultureand

SME Lending


Annual Agricultural/Rural Credit Policy*

Agriculture being the key driving force as well as the priority sector of Bangladesh economy, Bangladesh Bank (BB) has formulated Annual Agricultural/Rural Credit Policy and Program for the Fiscal year 2009-10 with a view to ensuring food security of the country. This policy and program will expand agricultural production and employment generating activities by increasing the flow of credit to the agricultural/ rural sector, which in turn, will revive the rural economy by increasing internal demand and thus, BB thinks, will boost up the economy of Bangladesh in the face of global economic recession.

The target for disbursement of agricultural/rural credit has already been fixed at around Tk. 11.5 thousand crore for FY 2009-10 Agriculture/Rural Credit Program and the amount is the highest so far which will be disbursed by the state-owned commercial banks (SCBs) and the specialized banks (SBs) simultaneously with the private (PCBs) and foreign commercial banks (FCBs). The targeted amount will not be limited to grains and crops only; rather adequate allocation has been made under this program for fisheries, livestock and agriculture supporting sectors as well as for income generating and poverty reduction activities in rural areas. In this regard, it may be mentioned that agricultural/rural credit disbursement target in FY 2009-10 has been increased by Tk.2133.07 crore (22.74%) compared to that in FY 2008-09 (Tk. 9379.23 crore).

Policies Regarding Agricultural/Rural Credit

Agricultural/Rural Credit Policy for Fiscal Year 2009-2010 has been formulated as a guideline for banks and other financial institutions to facilitate agricultural/rural credit system at the field level properly. The policy highlights for reaching out to relatively underdeveloped areas for delivering agricultural credit and timely & hassle free delivery of adequate agricultural/rural credit to small farmers & share-croppers. Besides disbursing agricultural credit at Union level openly through a transparent process, emphasis has been given on making

*Declaration of "Annual Agricultural/Rural Credit Policy and Program (FY 2009-10)", held on 7 September 2009.


district agricultural credit committee (DACC) more active so that only true farmers get agricultural credit. Simultaneously, banks are advised to disburse sufficient amount of credit for agricultural instrument purchase and other agriculture supportive sectors as well as for poverty reduction and income generating activities in rural areas, and to disburse agricultural/rural credit to women entrepreneurs on a priority basis. A comprehensive monitoring strategy for agricultural credit system is being devised by simultaneous monitoring of agricultural credit system at bank level and formation of 'Agricultural Credit Monitoring System' in Bangladesh Bank. In addition to maintaining existing policies for proper implementation of agricultural credit program, a good number of new pro-poor policies have been adopted.

The Salient Features of Agricultural/Rural Credit Policy

J A farmer may be sanctioned credit for up to 15 bighas (5 acres) of cultivable land as determined by credit norms. However, credit ceiling for growing potato and sugarcane will remain fixed at 2.5 acres of cultivable land.

J As per Agricultural/Rural Credit Policy, in disbursement of agricultural credit three core sectors of agricultural credit have to be given priority compared to other sectors. Sixty percent of agricultural credit has to be disbursed to grain and crop sectors only.

J Importance should be attached to regional crop production patterns and crop types (i.e., whichever crops grow better in a region) while disbursing agricultural credit through a pragmatic area-based approach.

J Banks with inadequate number of branches are advised to disburse agricultural/rural credit by establishing linkages with NGOs/self-employment supporting groups if and when needed.

J Banks are encouraged to disburse group-based loans to fishermen in various water bodies, haors and pools.

J In order to provide practical assistance in field level Agricultural Credit Program credit norms including per acre production cost of crops, necessary directions for co-crops and relay crops and crop calendar for planting & harvesting of crops and useful time limit for credit repayment by farmers have been linked with policies in collaboration with the Directorate of Agriculture under the Ministry of Agriculture.

Newly Added Policies

J Banks are directed to give priority to relatively underdeveloped and neglected areas such as char (shoal), haor and coastal areas in disbursing agricultural credit. Simultaneously, Bangladesh Bank will consider providing refinancing facility to encourage credit distribution programs in such areas.

J A portion of targeted agricultural/rural credit disbursement of Bangladesh Krishi Bank (BKB) and Rajshahi Krishi Unnayan Bank (RAKUB), who are receivers of Refinance facility from Bangladesh Bank, will be brought under NGO linkage program.


J In order to bring landless, marginal and sharecroppers under bank credit coverage, arrangement has been made for accessing agricultural credit by submitting certificates by landowners and important persons of society.

J To ensure fair prices of agricultural products at grower level banks and financial institutions are directed to disburse agricultural credit to genuine farmers as well as in favor of local small businessmen in the crop storage and marketing sectors under agricultural credit program so that small/large crop depots can be built.

J Banks and other concerned institutions are directed to provide necessary credit to successful farmers so that other farmers too get inspired by their success.

J A three-year revolving crop credit program is underway as a means to dispel complications in accessing agricultural credit for the same land arising from submission of land documents every year.

J Banks and other concerned institutions are advised to make arrangement for credit disbursement in the presence of local public representatives, concerned agricultural officers, teachers and other important persons in the community at Union level so that genuine small farmers and share croppers can access agricultural credit, grain and crop credit in particular, through a transparent process.

J Concerned institutions are also advised to disburse credit in favor of fishermen permanently residing in thesouthern region of the country so that they can purchase/procure fishing instruments such as boats,nets etc.

J Mushroom cultivation has been included in the list of sectors-subsectors eligible to access to agricultural credit considering the nutritional value and cultivability of mushrooms in Bangladesh.

J New agriculture initiatives have been included in agricultural/rural credit norms with a view to encourage them by providing necessary credit supports. In this respect, banks are directed to seek help from local Agricultural Extension Officers.

J To reduce import dependence agricultural credit has to be offered at 2% under government-declared rebate facility for growing agricultural products such as lentils, oilseeds, corns etc. including spices (ginger, garlic etc.).

J As an agriculture supporting sector irrigation, ploughing and harvesting machineries have to be provided with necessary credit. Each bank branch is advised to take initiative for disbursement of agricultural credit for purchasing at least one threshing machine.

J Besides supplying credit to agriculture and supporting sectors, credit has to be made available for different self-employment or income generating activities on individual or group basis with a view to expediting growth momentum in the rural economy.


J Concerned banks have to ensure effective monitoring system so that only the real farmers get necessary amount of agricultural credit in a timely and hassle-free manner and the targeted amount of agricultural credit is disbursed. Bangladesh Bank is also preparing a comprehensive agricultural credit monitoring strategy.

J Women entrepreneurs should get priority in agricultural/rural credit disbursement. Attainment of targeted amount of agricultural credit will be deemed as a plus point in getting permission for opening new bank branches.

J District Agricultural Credit Committee headed by Deputy Commissioner in each district has to be more active. Information centers established in DC offices will preserve the list of agricultural loan receivers.

J Banks will be encouraged to use modern Information and Communication Technology (ICT) including mobile phone in agricultural credit disbursement programs. A few banks have already opened Small and Medium Enterprise (SME) centers which may also play a supportive role in disbursing agricultural credit plough.

Annual Agricultural/Rural Credit Norms

As usually practiced every year, this year too Annual Agricultural/Rural Credit Norms for FY 2009-2010 has been formulated in collaboration with the Directorate of Agricultural Extension for the banks who disburse agricultural loans at field levels as well as for other concerned institutions. The main features of credit norms remain unchanged so as to bring credit facilities close to marginal farmers. However, credit limit has been increased in the range of 5-10 percent to match with production costs of the previous year.

Moreover, banks are allowed to adjust credit limit locally up to 10% according to real demands of farmers. Additionally, new agricultural initiatives will be able to avail funding supports and as a part of this facility cultivation of 'BAUkul', 'Apple Kul' and lichis have been included in the Agricultural Credit Norms (ACM).Further actions, if necessary, will be taken to include new agricultural initiatives in ACM for the rest of the fiscal year. Bangladesh Bank will take all necessary steps to implement the Annual Agricultural Credit/Rural Policy and Program in favor of marginal farmers of the country with the help of other banks. To add momentum to the agricultural credit system, Bangladesh Bank will invigorate its own monitoring system while the concerned banks will continue strengthening their respective monitoring systems. Bangladesh Bank will seriously consider any complaints regarding irregularities with or harassment of farmers. In case of severe complains, Bangladesh Bank will rapidly investigate into the matter and take necessary actions accordingly.


Financial Inclusion as a Tool for Combating Poverty- The Bangladesh Approach*

Basic financial services including deposit, payments and credit services are recognized as entitlements of all citizens; particularly in advanced economies (US has a federal law prohibiting discrimination by banks against lower income neighborhoods, and some state laws mandatorily requiring banks to offer basic accounts for low cost banking services, UK have government programs promoting financial inclusion).

Despite substantial bank branch expansion and emergence of microfinance institutions (MFIs), scant access to basic financial services still remains a deprivation suffered by large segments of the poorer rural and urban population in Bangladesh, more hurtful than other deprivations in restricting opportunities of freeing themselves from the poverty trap.

Financial inclusion of the poorest, particularly their access to small-sized credit for income generating self-employment activities (micro-credit) is a major tool in Bangladesh for combating poverty; pioneered by Nobel laureate Dr. Yunus in the late 1970s and by now replicated worldwide extensively. The coverage of financial services is still incomplete however, with gaps both at the lowest end and at some patches up the income ladder. Financial inclusion is therefore viewed as a high policy priority in Bangladesh, for more inclusive and more equitable economic growth.

With no widely adopted uniform definition, financial inclusion is reckoned in Bangladesh as access to financial services from:

a) Officially regulated and supervised entities (banks and financial institutions licensed by Bangladesh Bank, MFIs licensed by the Micro-credit Regulatory Authority, registered co-operatives), and

b) Official entities themselves (post offices offering savings, money transfer and insurance services, national savings bureaus).

Deposit services for safekeeping of savings is the stepping stone in accessing credit and other financial services on a continuing basis from banks, financial institutions including MFIs and cooperatives; the coverage of deposit services

* Address at the 1st AFI Global Policy Forum, Windsor Golf Hotel and Country Club, Nairobi, Kenya, held on 16 September 2009.


(number of deposit accounts /membership in deposit schemes in MFIs, cooperatives, post offices as percentage of adult population) is therefore a comprehensive primary measure of financial inclusion.

The coverage of credit services across income/occupational/ gender groups of the population and across economic activity sectors is another yardstick of financial inclusion important from the viewpoint of combating deprivation and poverty. This measure is more qualitative, expressed in terms of gaps, exclusions and barriers in access to financial services.

Early post-liberation financial inclusion initiatives in Bangladesh comprised:

i) Expansion of rural branches of banks (all of which were nationalized in 1971 after liberation of Bangladesh), and

ii) Promotion of mutually-owned co-operative societies offering financial and other specified services to members.

The better off rural elite benefited from these initiatives, but success in financial inclusion of the broad masses of illiterate, innumerate rural poor remained limited. The co-operatives tended to fall prey to 'elite capture' by powerful local groups uninterested in diluting control by enrolling poorer masses in large numbers. Rural branches of banks focused mainly on crop loans to farmers, their lending models were not geared towards reaching out to the poorer landless illiterate unable to handle the paperwork involved in bank borrowing. The regulated low interest rates on bank lending prevalent up to the late 1980s, not covering the high costs of managing small loans to borrowers in dispersed rural locations, was also a deterrent during that period.

The Grameen Bank and the MFIs brought about a major breakthrough in reaching out to the rural poor. They adopted lending models specifically including imparting necessary minimal literacy and numeracy to aspiring member borrowers; they were also free to realize interest and service charges at rates high enough to recover costs. Their programs also included some gender preference for female borrowers, in the expectation that improvement in their financial standing in the traditionally male dominated families will lead to improve better upbringing and education of their children.

While the number of deposit accounts in banks and memberships in MFIs and co-operatives are growing steadily, the rate of increase has slowed in the recent years, and about 25 percent of the adult population is still to be covered by deposit and other financial services from regulated institutions (table 3.1); quite probably the neediest but hardest to reach.


* Adult population is defined by BBS as population 15 years and above ** Financial Inclusion is measured here as(No. of bank deposit A/Cs + No. of MFI members + No. of members in cooperatives)/Adult population*100. ***Post offices and government savings bureaus are not included as these offer no credit services.

Source: Scheduled Bank Statistics, Bangladesh Bank and Statistical Year Book of Bangladesh, BBS

In access to credit, a 'missing middle'has emerged in the recent years between the poorest served by MFIs, and the relatively better off served by banks. Small businesses outgrowing eligibility for micro-credit from MFIs often find themselves considered too small by banks for their lending, landless sharecroppers not so poor as to be eligible for micro-credit from MFIs are considered ineligible for crop loans by banks, with no collateral for banks to fall back on in events of default. In terms of sectors of economic activity, major areas like agriculture, off-farm rural output activities and environment friendly renewable energy remain underserved by banks and other institutional lenders.

Bangladesh Bank (BB) and the Government of Bangladesh (GOB) have adopted several remedial measures to bridge these gaps in financial inclusion. BB has kept open refinance lines for banks against their loans to Small and Medium Enterprises (SMEs); multilateral development partners such as the IDA and ADB are supplementing BB's refinance programs with their co-financing lines. The agricultural credit program announced by BB for FY 10 enjoins all banks to engage in lending for a comprehensive range of on- and off-farm rural economic activities, with refinance lines available to them from BB in case of need. A Taka 2.0 billion refinance line has been introduced in FY 10 against bank loans for environment friendly investments in solar energy, biogas plants and effluent treatment plants. In FY 10 BB has also introduced a first ever Taka 5.00 billion refinancing line against loans to landless sharecroppers in a group-based special program designed by a major MFI. Further, BB has been urging banks and financial institutions to embrace specific commitment to financial inclusion as a Corporate Social Responsibility (CSR) obligation.

Table 3.1 Status of Financial Inclusion in Bangladesh

YearAdult

Population*(millions)

PopulationPer bankbranch

(millions)

Number ofbank

depositA/Cs

(millions)

DepositA/Cs as %of adult

population

Number ofmembers

in MFIs(millions)

MFImembers

as % ofadult

population

Number ofmembers incooperatives

(millions)

Cooperativemembers as% of adultpopulation

FinancialInclusion**as

% of adultpopulation

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

73.16

75.16

77.18

79.59

80.80

82.25

83.80

84.60

84.95

85.78

18669

18347

19886

20753

21406

21443

21420

21171

20920

20566

27.30

28.40

30.10

30.90

31.30

31.60

33.10

34.50

35.70

37.60

37.32

37.79

39.00

38.82

38.73

38.42

39.50

40.78

42.02

43.83

14.63

14.40

18.82

22.89

20.83

20.90

18.11

17.51

22.46

26.95

24.52

24.36

66.21

65.36

71.41

77.33

76.22

78.04

7.65

7.67

7.57

7.76

7.92

8.03

8.22

8.44

9.91

9.64

9.37

9.43

9.45

9.45

9.68

9.84


The government has been providing lending resources from the national annual budgets to MFIs (through PKSF, an apex financing agency for MFIs) for rural on- and off-farm self-employment micro and SME credit; with some gender bias towards empowerment of women. Financing lines from government budget are available also against loans to rural poor for construction of their basic shelter housing, in a number of schemes titled Grihayan, Ashrayan, Returning Home, and One home-One farm.

Although fair progress has thus far been achieved in financial inclusion (cf. table 3.1), much remains to be done in deepening inclusion in several patches where it is still shallow, and in bridging the remaining more recalcitrant gap; needing a new major breakthrough. High costs in management of portfolios of small sized loans to borrowers, rendering many of their possible lower return but lower risk output activities unviable. Advances in information technology now offer a window of opportunity for breakthrough in reducing the costs of managing small loans to borrowers in remote locations; with smart card based / mobile phone based arrangements for disbursement and recovery of loans. Lower costs of loans will enable currently excluded individuals and businesses to undertake new economic activities that generate lower returns but also involve lower risks.

Over the near term BB's policies will focus on leveraging the potential synergies in partnerships between banks, MFIs, and telecom/mobile phone service providers in bridging the remaining gaps in financial inclusion; with due attention to the risk management, consumer protection and systemic stability issues that may arise in these new arrangements. A few such partnership proposals already received are under scrutiny.


Economics of Integrating Access to Finance and Access to Information: Bangladesh Perspective*

Access to information and access to basic financial services can be viewed as the two sides of the same coin. The integration of these two is important in reducing asymmetric information, improving borrower selection and credit recovery system, ensuring quick and cost effective distribution of workers' remittances in remote area, enhancing familiarity with banking activities and many others.

The paper envisage the economic potential of integrating financial and information services for better outcome in the context of Bangladesh by analyzing three possible ways: a) by offering information services by telecentres using banks/MFI branches; b) by offering financial services through telecentres or their networks; c) using telecentres in developing credit products.

Basic financial services including deposit, payments and credit services are recognized as entitlements of all citizens. Financial inclusion is a key element of social inclusion necessary in fostering inclusive growth participated by and benefiting all population segments and in combating poverty by opening up blocked advancement opportunities for the disadvantaged poor.

Despite substantial expansion of bank branches and the roles thus far of microfinance institutions (MFIs), access to basic financial services in Bangladesh has much further to go in adequately covering all population segments and all sectors of economic activities. In rural areas, there is a knowledge gap and information asymmetry in agricultural production and marketing, non-farm activities, health, education, employment and disastermanagement. Besides, small and micro enterprises often find it difficult and time consuming in accessing credit from the formal financial institutions. In access to credit, a 'missing middle' has emerged in the recent years between the poorest served by MFIs,and the relatively better off served by banks.

Since, much remains to be done in deepening access to credit and other financial services in several shallow patches, and in bridging the remaining more recalcitrant gap, a major new breakthrough will be needed and such

*Seminar on 'Economics of Integrating Access to Finance and Access to Information: Bangladesh Perspective', organized by BIBM at BIBM auditorium on 27 December, 2009.


breakthrough could be brought about by advancement of information technology (IT). Lower borrowing costs made possible by IT based remote delivery and recovery of loans will enable many currently excluded individuals to borrow for new output activities.

Rural bank branches and MFIs in Bangladesh have been playing a great role in offering credit services to the poorer communities. However, ensuring greater coverage, reducing operation costs and attaining financial sustainability remain challenges for the financial service providers. Closer integration or linkages between the financial and information service providers could help reducing asymmetric information and improving performance of financial products.

Telecentres have the potentiality of gathering information about potential clients and channeling remittances to the recipients in rural areas in due time and at lower costs. Besides, telecentres could be useful in providing valuable information on technology,markets, better irrigation system and so on to the farmers and thus can contribute to favorable market conditions for the farmers.

In order to facilitate banks and financial institutions to ascertain the full credit exposure of the borrowers/owners, Bangladesh Bank (BB) started establishing fully automated Credit Information Bureau (CIB) since 1992 to collect credit related information from banks and other financial institutions. This is now in a mature stage and hopefully will go live very soon. Banks will also get credit related information directly from the CIB online information storage from the mid 2010. BB has introduced online payment system this year to facilitate the use of e-commerce and online banking services. In this regard telecentres can work along with the financial institutions particularly in rural areas in disseminating information related to financial services and products and thus bring about positive outcomes for the service recipients and the society. Establishment of E-payment gateway, a necessary IT infrastructural support for the e-commerce operation is also progressing pretty fast.

Integration of financial and information services should be considered with priority with the aim of addressing the problem of insufficient access to required information by the rural poor and underprivileged with the target of creating income generating activities, employment opportunities and poverty reduction. And all these are being implemented at a fast pace with necessary stakeholder participation.

Surely, together we will be able to achieve an all inclusive digital Bangladesh Bank, which will be more transparent and accountable to all stakeholders.


Promoting Financial Inclusion for Poverty Reduction with Inclusive Growth*

I am much gratified to be chosen by Bangladesh Economic Association to deliver the memorial lecture in honor of the distinguished late journalist Md. Bazlur Rahman, renowned for his intrepid professionalism, integrity, dispassionate objectivity and progressive outlook on socio-political issues. A rich crop of eminent journalists in Bangladesh acknowledge debt of gratitude for the guidance and grooming they received from him in their professional careers. His contemporaries and disciples active in fields outside journalism including politics and academia fondly remember him as a warm-hearted erudite man, keenly observant, principled and fair-minded in analyzing current events and developments. His dispassionate objectivity didn't ever mean passivity or indifference in social issues; he was steadfast in progressive views and convictions about the urgency of righting socio economic wrongs including deprivation and poverty; partnering in activism with another celebrated progressive, his spouse Ms. Matia Choudhury, now the honorable minister for agriculture.

The sorrow and sense of loss in demise of Mr. Bazlur Rahman is still fresh and acute in us, and I believe it will be fitting and appropriate for this memorial lecture to be on an issue at the core of his progressive convictions. Accordingly my memorial lecture will be on widening and deepening financial inclusion, an important tool for combating poverty and social deprivation with broad based inclusive growth.

Financial inclusion is a major dimension of the broader notion of social inclusion (the antithesis of social exclusion), or people's opportunity for contributing to and benefiting from social and economic progress. Poverty related deprivations in health, education and asset ownership are major causes of financial and social exclusion, curtailing or altogether blocking opportunities of employment, income, borrowing and so forth. Physical and mental debilities; discrimination by race, religion, caste, cult or gender; social disruptions from prolonged conflicts and wars are among other main causes of financial and social exclusion. The broad range of causative factors means that financial and social exclusion is likely to be seen in varying degrees in almost all countries, developing or developed; and therefore social and financial inclusion figure

*Bazlur Rahman Memorial Lecture on 'Promoting Financial Inclusion for Poverty Reduction with Inclusive Growth', organized by Bangladesh Economic Associate on 8 April, 2010.


prominently in policy agenda even of mature developed countries. Poverty related deprivations and exclusions are starker and more entrenched in low income developing countries like Bangladesh, with attendant higher urgency of remedial actions.

Related to financial and social inclusion is the notion of inclusive growth, a growth process participated by and benefiting all population segments. Inclusive growth stresses on equality of advancement opportunities rather than on equality by redistribution of income; and is tolerant of 'good inequalities' that are incentives for competitive efficiency, like income differences arising from rewards for innovation, and for superior skills, aptitudes and education. Inclusive growth utilizing the unleashed creative energies of hitherto excluded population segments in growth pursuits is likely to be more broad based and robust, in terms of income and other metrics of well-being including human development, food security, and environmental sustainability.

In daily life we need basic transaction services like accepting our deposits, lending us money for current expenses or for investment, effecting money transfers and settlement of payments. Financial inclusion means access to these basic financial services. Affluent urban individuals and businesses have ready access to these and other more complex financial services from banks and financial institutions including insurance companies and capital market institutions. Banks and other formal financial institutions have few branches or service outlets in rural areas, small sized transactions with the poor being costly and un-remunerative for them. Illiteracy still prevalent among adults in rural areas is also a significant barrier to their accessing financial services from formal institutions. In cities and towns migrant day laborers from rural areas face yet another barrier to accessing institutional financial services in their lack of definitive present address.

Forming mutually owned co-operative societies was an officially supported early initiative in financial inclusion of rural and urban people of modest means in similar occupations. Once formed, these co-operatives focused on advancing interests of existing members, often falling prey to elite capture by more influential members, with little interest in risking dilution of control by expanding membership. In any case, the co-operatives movement was not designed to target the poor owning little or nothing in assets.

Financial inclusion by way of the poor's access to small-sized loans for income generating self-employment activities (micro-credit) from microfinance institutions (MFIs) has been extensively employed in Bangladesh as a tool for combating poverty related deprivations; pioneered by Dr Yunus with the Grameen Bank in late nineteen seventies, and by now replicated worldwide. As elsewhere, ill informed, gullible people particularly in rural areas in Bangladesh have at times fallen prey to financial scams of pyramid /Ponzi schemes promising quick high profits, only to lose the investments in inevitable collapse of the schemes. To prevent such deception in MFI activities and to ensure that these are run with integrity and soundness, the Government of Bangladesh (GOB) has established the Micro-credit Regulatory Authority (MRA) chaired by Governor, Bangladesh Bank (BB) to license and supervize MFIs. The MRA being chaired by Governor of BB, the apex financial sector regulator has given a huge


boost to credibility of MFIs licensed and supervised by MRA.

Typically, MFI membership commences with opening of deposit accounts with minuscule sums and short spells of group-based learning sessions for new members in basic minimum financial literacy, followed by loan disbursements for income generating self-employment pursuits. The deposit, borrowing and repayment transactions with MFIs help micro-credit borrowers prepare themselves for eventually accessing larger loans and other financial services from formal institutions like banks.

Despite substantial expansion of bank branches and the roles of co-operatives and MFIs, financial inclusion in Bangladesh has much further to go in adequately covering all population segments and all economic activity sectors. About one-fifth to one-fourth of the population still live in extreme poverty; many of them incapable of undertaking micro-credit supported self-employment initiatives due to old age or other debility. With few financial service outlets reaching out to this weakest population segment, accessing whatever modest social safety net payments they are entitled to require them to incur substantial cost in time and travel expenses. Again, not that it is only the poorest that suffer from financial exclusion. MFI borrowers successfully breaking out of extreme poverty and outgrowing eligibility for micro-credit often find themselves in a 'missing middle', still not deemed eligible for larger loans by banks or other formal institutions. Significant market gaps and market failures persist in financing of important growth oriented economic activities like agriculture and SMEs. These exclusions and gaps are holding down economic growth and poverty reduction; and financial inclusion is therefore a high policy priority in Bangladesh, for faster, more inclusive growth and poverty reduction.

Measuring Financial Inclusion

As yet without a widely adopted uniform definition, financial inclusion is reckoned in Bangladesh as access to financial services from entities supervised by official authorities, or from official institutions, including:

a) Banks and financial institutions supervised by BB,

b) MFIs supervised by the MRA,

c) Credit co-operatives supervised by the Registrar of Co-operative Societies,

d) Insurance companies supervised by Insurance Regulatory Authority,

e) Capital market institutions like investment banks, merchant banks, stock exchanges supervised by the Bangladesh Securities and Exchange Commission (BSEC),

f) Post offices of the government offering savings, money transfer and insurance services; National Savings Bureaus issuing government savings instruments.


The clientele of secondary and tertiary financial service providers (like insurance companies, capital market institutions) are also recipients of primary financial services of deposit taking, lending and money transfers, their double counting need to be avoided while measuring the extent of financial inclusion.

Deposit services for safekeeping of savings is the stepping stone in accessing credit and other financial services on a continuing basis from banks, financial institutions, MFIs and cooperatives; the coverage of deposit services (number of deposit accounts /membership in deposit schemes in MFIs, cooperatives, post offices as percentage of total population) is therefore taken as a comprehensive primary measure of financial inclusion.

The coverage of credit services across income/ occupational /gender groups and across economic activity sectors is another yardstick of financial inclusion, important from the viewpoint ofgrowth and combating poverty. This measure is more qualitative, expressed interms of gaps, exclusions and barriers to accessing financial services.

Approaches in Widening Financial Inclusion- Progress Thus Far

Early post-liberation financial inclusion initiatives in Bangladesh comprised:

i) Expansion of bank branches in rural areas (all domestic banks were nationalized in 1971 upon liberation of Bangladesh), and

ii) Promotion of mutually-owned co-operative credit societies offering deposit and credit services to members.

The better-off rural elite benefited from these initiatives, but financial inclusion of the broad masses of illiterate, innumerate rural poor remained limited. As mentioned earlier, the co-operatives tended to fall prey to 'elite capture' by powerful groups uninterested in diluting control by expanding membership; and the co-operative movement actually was not targeted to the poorest population segments owning little or nothing in assets. Rural branches of banks focused mainly on crop loans to farmers, there lending models not geared towards reaching out to the poorer landless illiterate unable to handle the paperwork involved in bank borrowing. The regulated low interest rates on bank lending prevalent up to late nineteen eighties, insufficient to cover the high costs of managing small loans to borrowers in dispersed rural locations, was also a deterrent.

Grameen Bank and the MFIs brought about a major breakthrough in reaching out to the rural poor. Their lending models specifically included imparting of necessary minimal literacy and numeracy to aspiring member borrowers; they have also been unrestricted in realizing interest and service charges at rates covering their higher costs. Their programs were designed with some degree of gender bias favoring women, in the presumption that women's enhanced financial standing and stature in the traditionally male dominated families will lead to better upbringing and education of their children.

Besides extending micro-credit, many MFIs in Bangladesh are collaborating with insurance companies in extending micro-insurance to the poor, offering


modest covers such as credit life insurance ('debt dies with debtor'), health and accident insurance (for sicknesses and injuries requiring hospitalization etc), property insurance (usually for livestock bought with MFI loans), at affordable rates of premium. Typically the MFIs act as partner agents of the insurance companies, collecting micro-insurance premia on their behalf, most often by deduction at source while disbursing micro-credit loans. Regular published data on micro-insurance in Bangladesh are as yet unavailable; a February 2007 survey posted in CGAP's microfinance gateway (www.microfinancegateway.org) reported 10 insurance companies in partnership with 61 MFIs, offering different micro-insurance products in 81 schemes; with cumulative premium collection of over Taka 11.2 billion from about 4.5 million clients. Some empirical studies employing differing methodologies and covering differing time spans, dispute the poverty reduction impact of micro-credit claimed by its protagonists. Episodes of borrower distress from rigorous micro-credit repayment disciplines, in many cases compounded further by multiple MFIs lending to the same borrower, occasionally do appear in newspapers. It is easy to see that self-employment initiatives financed by micro-credit are far from being risk free for borrowers and lenders, ill-chosen initiatives and lax loan sanction and management disciplines can and do land lenders and borrowers occasionally in difficulties; requiring prompt but appropriately flexible corrective responses. Such difficulties do not negate the reality that financial inclusion by way of micro-credit indeed unlocks opportunities for the despondent poor to lift themselves out of poverty; unleashing in them the optimism and creative energies necessary to retry and get over occasional setbacks.

Another criticism that micro-credit does not help the poorest of the poor is not tenable because micro-credit is intended only for those who can use it in income generating activities. Those unable to do so because of old age or other infirmity need to be supported by outright transfers from the social safety net (the traditional safety net offered by extended families exists no longer, the extended families breaking up into smaller ones), and here financial inclusion help recipients by eliminating or reducing costs they face in accessing the safety net payments.

Social innovations promoting financial inclusion like micro-credit and the programs designed to bridge market failures and gaps in agricultural and SME financing help spawn diverse cycles of other innovations by entrepreneurs in the real sector, fostering broad based inclusive growth in the true sense. For instance, SME financing has helped innovative entrepreneurs in small light engineering workshops in Bangladesh to develop and expand into a huge network producing plant/machinery spares (and sometimes plants/machines in entirety) of all descriptions for the manufacturing, transportation, construction and agricultural sectors, at fractions of import costs. In the early nineteen eighties the emerging apparels export sector had scant access to foreign exchange for their import of inputs, the innovation of back-to-back usance LCs for input imports against export LCs from buyers got around the problem, unleashing decades of sustained growth.


* Adult population is defined by BBS as population 15 years and above** Financial Inclusion is measured here as(No. of bank deposit A/Cs + No. of MFI members + No. of members in cooperatives)/Adult population*100. *** Post offices and government savings bureaus not included as these offer no credit services.

Source: Scheduled Bank Statistics, Bangladesh Bank and Statistical Year Book of Bangladesh, BBS

The number of deposit accounts in banks and the number of members in MFIs and cooperatives are growing steadily, but the rate of increase has slowed in recent years. About 25 percent of the adult population is still to be covered by deposit and other financial services from regulated institutions (table 3.1), quite probably the hardest to reach. In access to credit, a 'missing middle' persists between the poorest served by MFIs, and the relatively better-off served by banks. Small businesses outgrowing eligibility for micro-credit from MFIs often find themselves considered still too small by banks for their lending; sharecroppers not so poor as to be eligible for micro-credit from MFIs are deemed ineligible for crop loans by banks, with little or no collateral to fall back upon in events of default. In terms of sectors of economic activity, important areas like agriculture, off-farm rural output activities and environment friendly renewable energy remain under-served by banks and other institutional lenders.

BB and the government have adopted several remedial and promotional measures to bridge the gaps in, and to deepen financial inclusion. In SME financing, BB has made available refinance lines for banks against their

Table 3.1 Status of Financial Inclusion in Bangladesh

YearAdult

Population*(millions)

PopulationPer bankbranch

(millions)

Number ofbank

depositA/Cs

(millions)

DepositA/Cs as %of adult

population

Number ofmembers

in MFIs(millions)

MFImembers

as % ofadult

population

Number ofmembers incooperatives

(millions)

Cooperativemembers as% of adultpopulation

FinancialInclusion**as

% of adultpopulation

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

73.16

75.16

77.18

79.59

80.80

82.25

83.80

84.60

84.95

85.78

18669

18347

19886

20753

21406

21443

21420

21171

20920

20566

27.30

28.40

30.10

30.90

31.30

31.60

33.10

34.50

35.70

37.60

37.32

37.79

39.00

38.82

38.73

38.42

39.50

40.78

42.02

43.83

14.63

14.40

18.82

22.89

20.83

20.90

18.11

17.51

22.46

26.95

24.52

24.36

66.21

65.36

71.41

77.33

76.22

78.04

7.65

7.67

7.57

7.76

7.92

8.03

8.22

8.44

9.91

9.64

9.37

9.43

9.45

9.45

9.68

9.84


agricultural and Small and Medium Enterprise (SME) lending; multilateral development partners such as the IDA and ADB are supplementing BB's refinance lines with their co-financing. Besides, BB is allowing banks to open SME service booth in areas with no branch banking coverage of their own.

The agricultural credit program announced by BB for FY 10 enjoins all banks to engage in lending for a comprehensive range of on- and off- farm rural economic activities, with refinance lines available to them from BB in case of need. A Taka 2.0 billion refinance line has been introduced in FY 10 against bank loans for environment friendly investments in solar energy, biogas plants and effluent treatment plants. In FY 10 BB has also introduced a first ever Taka 5.00 billion refinancing line against loans to sharecroppers in a group-based special program designed by a major MFI.

In issuing new branch licenses to banks, BB has been following a policy of requiring at least one in every five new branches to be in rural locations, with a view to pushing forward banking services physically closer to the rural population.

BB has also been exhorting banks and financial institutions to embrace fostering financial inclusion as a Corporate Social Responsibility (CSR) obligation. To mitigate risks in agricultural production (and hence also in agricultural financing), introduction of crop insurance has been included in GOB's Food Policy agenda. Introduction of a scheme of partial guarantee for mitigating SME lending risks likewise merits consideration.

A Challenge Fund in the ongoing DFID supported BB initiative for automation of the payments system in Bangladesh, the Remittance and Payments Partnership (RPP) project, is promoting innovations of faster and cheaper remittance and money transfer services; broadening and deepening financial inclusion particularly of rural recipients of remittances from family members working elsewhere within or outside the country. Partial grant support incentives from the Challenge Fund has already spawned a number of new IT based remittance delivery processes that are superior in speed and affordability for users. The soon to commence online automated clearing and settlement of cheques and electronic fund transfers by the Bangladesh Automated Clearing House (BACH) will hopefully trigger innovation of yet other new service packages custom tailored to needs of specific client segments, further widening and deepening financial inclusion.

Government has been providing lending resources from annual national budgets for micro-credit (through PKSF) and for SMEs (through the SME Foundation), with some gender bias towards empowerment of women. Financing lines from government budget have been made available also against loans to rural poor for their basic shelter housing, in a number of schemes titled Grihayan, Ashrayan, Returning Home, and One home-One farm.

The Post Office Department of the government has been actively engaging with banks, mobile telephone companies, other external and internal remittance intermediaries to offer faster remittance and money order delivery to recipients.


Lately the government has embarked on a program of delivery of fertilizer and irrigation fuel subsidies for agriculture directly to individual farmers. To make this a success, Bangladesh Bank has asked state owned agricultural and commercial banks to ensure that their rural branches open bank accounts with deposits as low as Taka 10 in the names of farmers against identity cards/papers issued by Agriculture Department. Over 7.5 million new bank accounts have already been opened; privately owned banks are also encouraged to open bank accounts of farmers in their branches in rural areas. Direct delivery of government subsidy into the bank accounts of individual farmers will be a huge leap forward in extending and deepening financial inclusion.

Very recently, Bangladesh Bank organized a cross-country banking sector road show led by Governor and other senior management members. In this road show commercial and specialized banks came forward to connect and interact with the general population, providing information and receiving user feedback about their lending, deposit, remittance and payments service packages; building up in the general population literacy on financial services and awareness against money laundering and illegal hundi channels in remittance delivery. This major new campaign-mode drive in widening and deepening financial inclusion will be repeated, appropriately refined, in other regions of the country.

The Way forward

The progress attained thus far in financial inclusion is quite fair, with deposit services from regulated entities available to more than

three fourth of the adult population (cf. table 3.1). However, as already mentioned, much still remains to be done in deepening access to credit and other financial services in several shallow patches, and in bridging the remaining more recalcitrant gap. High costs of managing portfolios of small-sized loans to borrowers in dispersed locations mean high interest rate/service charge burdens on the borrowers, rendering their use of micro-credit for low risk but low return output activities unviable. Advances in information technology offer windows of opportunity for breakthrough in reducing the costs of managing small loans to borrowers in remote locations, with smart card /mobile-phone based arrangements for disbursement and recovery of loans. Full advantage need to be reaped from these new windows of opportunity. The

Table 4.1: Growth trends and teledensity of mobile and fixed phone

Source: Bangladesh Telecom Regulatory Commission (BTRC); Figures are end June numbers.

Mobile phone subscribers (millions)Fixed phone subscribers (millions)Total subscribers (millions)Growth rate of mobile phone subscribersGrowth rate of fixed phone subscribersTotal growth rateTele-density (in percent)

20044.150.834.98

...

...

...3.62

20059.270.87

10.14123.37

4.82103.61

7.25

200620.81.02

21.82124.3817.24

115.1915.39

200734.481.19

35.5765.2916.6763.0224.71

200843.71.28

44.9827.117.56

26.4527.91

200946.691.44

48.136.84

12.507.00

32.09


number ofmobile phone subscribers is expanding fast in Bangladesh, already covering more than half the adult population (cf. tables 4.1, 3.1). Lower borrowing costs made possible by IT based remote delivery and recovery of loans will enable many currently excluded individuals and businesses to borrow for output activities that generate low returns but also involve low risks.

BB's policies are currently focusing on leveraging the potential synergies in innovative cost saving partnerships between banks, MFIs, and telecom/mobile phone service providers in bridging the remaining gaps in financial inclusion; with due attention to the risk management, consumer protection and systemic stability issues likely to arise in the new arrangements. Some of such partnership proposals have already been approved and operational. A number of GOB owned public utilities are collecting utility bills from users through mobile phone based arrangements, saving the bill payers travel costs to and queuing up time in traditional crowded receipt booths. Similar cost saving IT based remote delivery arrangements are possible for numerous government payments in small amounts like social safety net allowances for the eligible poor, pension payments for retirees, salary subvention payments for teachers in privately run schools, subsidies for farmers and so forth. Well-designed IT based arrangements of this kind for these payments will prevent leakage or wrongful delivery of benefits, besides deepening financial inclusion.

To conclude, financial inclusion combats poverty by unblocking advancement opportunities for the disadvantaged poor, thereby fostering social inclusion and inclusive socio-economic growth. In Bangladesh, following bank branch based, co-operatives based and MFI based phases of major expansion, we are pinning hopes and efforts on IT based cost-saving innovations for another phase of major breakthrough in closing the remaining gaps and shallow patches in financial inclusion.

The tasks of promoting financial inclusion and poverty eradication may never be seen as completed once for all; natural or man-made disasters quite often can and do push the affected population sections into hardship and exclusion. Also, poverty is a relative rather than absolute notion in perception. Regardless of however much affluent a society is, extremes of inequality will always be seen as constraining social and financial inclusion of the less advantage population sections. This is why social and financial inclusion figures prominently in social charters / social policy agenda even in mature developed economies.


Mobile Phone Based Remittance Service*

Prompt delivery of remittances of migrant workers to recipients in rural areas away from bank branches at affordable costs has for long remained a challenge for banks. Remitters and recipients not well-served by banks have often been lured by fast acting hundi channels diverting the foreign exchange inflows to illegal capital flight, tax evasion and crime/terrorism financing.

Fast expanding mobile telephony in Bangladesh already covers well over half the total adult population. This has opened up windows of opportunity for creative partnerships of banks and mobile telephone companies in devising cost effective arrangements for delivery of remittances (and eventually other financial services) through the countrywide area agent networks of mobile phone companies covering rural areas distant from bank branches. BB has for sometime now been encouraging such partnerships between banks and mobile phone networks. A number of such partnerships are already active and BB welcomes another partnership between Dhaka Bank, EBL and Banglalink.

These bank-led partnerships are win-win cases for all concerned. Remitters and recipients benefit by fast, reliable and efficient service from legitimate channel free of shady hundi operators and money launderers; banks benefit by extended outreach to new client bases; and mobile telephone companies benefit by earnings in fees / commissions from increased utilization of their networks and IT processing capacities. The partnerships need not limit merely to delivery of worker's remittances from abroad, arrangements can be devised to cover other receipts and payments, like delivery of inland remittances from migrant rural workers in urban areas to their families in rural homes, delivery of government's pension and social safety net payments to beneficiaries, delivery of government subsidies for fertilizer and irrigation fuel to farmers, delivery of loan disbursements from and loan repayments to banks, collection of utility bills, government taxes and levies, life insurance premiums and so forth. These arrangements will constitute key elements of wider and deeper financial inclusion envisioned by BB, and of E-governance in Digital Bangladesh envisioned by our government. The newly commissioned automated clearing in

*Inauguration of Dhaka Bank-EBL-Banglalink on 'Mobile Phone Based Remittance Service', 13 April 2010.


BACH at BB settling inter-bank electronic fund transfers will facilitate these arrangements further.

BB wishes all success for the newly launched bank-mobile phone company remittance delivery partnership, and will be happy to see it expand in the directions indicated above.


Financial Inclusion: The Next Chapter*

Financial exclusion or deprivation from access to financial services leading into significant extent of social exclusion, is endemic in poverty ridden low income countries; but exist even in affluent countries, arising from wars, social conflicts, religious, ethnic or ideological alienations etc.

In Bangladesh and elsewhere, the thrust for fuller Financial Inclusion (FI) has thus far been not from spontaneous initiative of banks and financial institutions in reaching out with financial services to the excluded population segments, but rather from civil society/NGO activism. These civil society and public authority initiatives have made significant strides in broadening financial inclusion. Despite constraints of low literacy among the poorer masses, nearly four-fifth of the adult population of Bangladesh are now covered by basic financial services from banks, MFIs, Cooperatives and Post offices regulated, supervised or run by public authorities. Use of mobile phone and smart card technologies is making possible cost effective remote delivery of financial services to rural and urban clients in myriads of small value transactions. Bangladesh coped well in the recent global financial meltdown mainly because of buoyant domestic demand well supported by financial inclusion initiatives of authorities in areas including agriculture, SMEs and renewable energy.

The government and the central bank in Bangladesh have intensified efforts to bring the remaining excluded population segments and economic sectors into financial inclusion; with new support programs like refinance against loans to sharecroppers (besides mandatory involvement of banks in agricultural financing), micro and small enterprises, renewable energy and effluent treatment projects; encouraging creative partnerships between banks, MFIs, mobile phone and smart card technology platforms innovating cost effective financial service packages for various client segments.

Progress thus far in broadening FI has been substantial, but there are gaps to be bridged, and extensive swathes of shallow FI patches to be deepened. A fifth of the adult population of Bangladesh still to be drawn into FI, scaled up SME financing from formal institutions not easily accessible by MFI clients rising

* FT Sustainable Banking Conference held at London on 3 June, 2010.


up the income ladder, difficulties for SMEs in marketing their products at fair prices, environmental sustainability issues in micro/SME output activities not adequately addressed. Sorting these problems out on a sustainable, durable basis will require formal financial and non-financial businesses to be drawn into business models that explicitly include the low income poor as their new customer bases in socially and environmentally responsible business pursuits. There are already several instances of such successful initiatives around the world, under rubrics such as 'social entrepreneurship', 'socially responsible competition', 'social market economy' and so forth; aimed at promoting inclusive growth and hastening poverty reduction in the billions at the 'bottom of the pyramid' living on income of two US dollars or less a day. In Bangladesh, BRAC is a major success example in engaging formal bank, MFI, and non-financial businesses in viable horizontally and vertically integrated linkages with micro and small enterprises. The bank and MFI arms of BRAC finance micro enterprises and SMEs in diverse pursuits; non-financial business units of BRAC further process or sell the output of micro/SMEs, using retail chains and marketing links in and outside the country. Grameen Bank has also developed some similar linkages between its micro/small enterprise clients and larger non-financial businesses. Many other MFIs have forged linkages with banks, they now need to focus on extending these linkages to socially and environmentally responsible non-financial businesses; in sustained viable relationships.

The incipient trends in socially and environmentally responsible business practices aiming at fuller financial and social inclusion with inclusive growth and rapid poverty reduction will need to be supported actively, both globally and nationally. At the global level, the ISO may complete its already taken up work of setting the standards for socially and environmentally responsible business practices, both financial and non-financial. The ICC and its country chapters may usefully hasten adoption of the agreed upon standards. In Bangladesh, the CSR guidelines for the financial sector issued by Bangladesh Bank encourage forging of linkages of the formal financial sector with MFIs and non-financial businesses. National authorities may encourage and promote tie-ups of larger non-financial businesses with micro and SMEs with incentives like time-bound tax waivers/concessions on income from socially and environmentally responsible business lines. Global dialogues on these issues should have adequate representation of non G20 countries, as these are where most of the world's financially and socially excluded population live.


Tagore's Thoughts on Rural Credit and Development*

The paper focuses on Rabindranath Tagore's thoughts and initiatives on rural development. Tagore aimed at protecting the peasants from the burden of loans. He established 'Agricultural Bank' in his zamindari estates, Shilaida and Patisar and also in Sriniketan. The intention was to save the poor from the clutches of rural money lenders (Mohajon), who used to provide credit to the poor at a very high rate of interest. He donated his Nobel Prize (1913) money to Santiniketan school and invested the fund in the Patisar bank for well-functioning of the bank. The poet took a variety of institutional initiatives at Patisar and Sriniketan to put the poor farmers and other neglected sections of the society on the road to development and made them self-reliant. Tagore set up a model structure of rural development comprising education, art and culture, health, communication and welfare at Sriniketan. He introduced modern farming method at Patisar bringing mechanised ploughs from Kolkata. Moreover, Tagore's son Rathindranath, son-in-law Nagendranath, graduated in agricultural science from the University of Illinois, USA had been actively involved in establishing modern agricultural farm. Tagore introduced the concept of co-operative a hundred years ago to unite the poor and thus revive their self-confidence. Tagore emphasized on equity as well. He was strongly influenced by the success of co-operative movements in Russia, Ireland and other European countries. His thoughts on co-operative certainly shakes up un-trammelled market economics of the current time which has relegated social responsibility and justice to the back.

Rabindranath Tagore is undeniably an indispensable part of our existence. Tagore remains the perennial source of inspiration even in the post-modern world. The legendary poet came to East Bengal with the responsibility of supervising his family's zamidari in 1890. He administered three estates: Birahimpur, Shajadpur and Kaligram with headquarters located at Shilaidah, Shajadpur and Patisar respectively. His close interaction with the deprived subjects of the region gave him a clear picture of their misery and deprivation which left a deep and lasting imprint on his mind. He also witnessed the struggle of his subjects for their livelihood from a close quarter. Unlike other

*International Conference on 'Contemporarising Tagore and The World', 29 April - 1 May, 2011.


ruler, Rabindranath extended benign hands towards distressed farmers (since most of his subjects were farmers), and came forward with indigenous (Swadeshi) development strategies in the areas of education, co-operatives, banking, agricultural technology, health and so on.

The basic philosophy of Tagore was to unite the rural people to revive their self-confidence. He believed that unity is strength. He intended to facilitate welfare to the people with love. He emphasized on co-operative hundred years ago to face the oppression of the zamindars. He believed that people should be united, and also be aware of their own right. However, Tagore preferred modernity against the tradition. His essay 'Swadeshi Samaj' envisaged a self-administered and self-reliant society. His dream was to build up a country with enlightened people. Tagore said, "To liberate the country is to liberate the people from ignorance and illiteracy."

Tagore was very kind to his subjects. He thought for the distressed people who used to borrow money from rural money lenders (Mohajon) at a very high rate of interest. This process of lending was harshly exploitative. These people could not get out of this vicious cycle of money lending process. Tagore took this issue very seriously and established co-operative banks for the poor in Shilaidah, Patisar and Sriniketan. The purpose of this paper is to explain how institutional credit to the rural poor worked as Tagore initiated, and its relevance to the socio-economic development strategies even today.

Contemporarising Tradition into Modernity

Tradition and history reflect the stage of development. Tagore's reflections can appear as a pool of great power in this regard. We can turn our attention to our own intellectual acquisitions. Many of Tagore's socio-economic thoughts can be an enabling force in charting a path of our own. There are such theoretical threads inlaid in Tagorean thought that they, besides being certainly modern, can be relevant for a future that is yet to arrive. Hence, many now don't hesitate to label Tagore as even a 'post- modernist'.

In a dynamic context, tradition has both strengths and weaknesses. In fact, development has very often been seen as a set of interdependent process through which traditional society is transformed into a modern society. Traditional society was thought to be static with little differentiation or specialization, a predominance of mechanical division of labour with a strong agrarian base, while modern society was seen as possessing a very high level of differentiation, high degree of organic division of labour, specialization, urbanization, literacy, exposure to mass media and imbued with continuous drive towards progress. The development strategy pursued in the last few decades aimed exactly to 'modernize' the so-called traditional society. But the so-called drive for modernization did not lead to an automatic 'trickle down' of its benefits to the masses especially the majority of rural population. The rural sector could not be carried on the back of the urban industrial sector.

Drive for modernization is a historical phenomenon which does not take into account the inner strengths of the indigenous society. While emphasizing tradition as the major impediment to development, they have in fact overplayed the inhibiting aspects of tradition. Moreover, there is a need for


greater degree of analytical distinction between different elements of "tradition" if someone wants to capture these developmental distortions.

Of late the virtues of traditions are being re-emphasized. This is particularly done to reorient the connotation of development. Development now is seen as efforts at human development. Eminent Economist Late Mahbub Ul Haq (1997) constructed various Human Development Indices (HDI). Besides, Amartya Sen (1981) has endeavoured to investigate the causes of human deprivation (as regard to basic amenities like food, nutrition, healthcare, education, woman's rights, etc.) and assessed them in terms of 'entitlements' and 'capabilities'.

Brody (1985) re-emphasizes to see development as total metabolism of society, i.e., the full range of human activities. He says that growth rate measured in terms of national income accounting is only a fraction of the real activities in society. What is needed is the growth of human resources. A social environment or an organizational framework can only ensure such kind of human development. Social mobilization is now the keyword in the paradigm of development. People cannot be developed; they develop themselves. Social mobilization helps people to find that initiative. And this owes a lot to the seeds laid in the past episodes of mobilization. For example, there were many agrarian revolts in the then Bengal. 'Tebhaga' movement was one such deep peasant uprising. Contemporary Bangladesh benefited a lot from those experiences, particularly during its struggle for independence in and before 1971.

Certainly people can economize their own energy and learn how to survive in great odds. People have acquired appropriate skills for resource utilization. People can still perform miracles if they can move in groups with similar interests. Various social values related to collective ethics, community living can prove to be quite useful in improving livelihood.

Tradition may play an inhibiting role as well. Sociologists call this traditionalism. Particularly the traditional elites invoke the tenets of this traditionalism in order to raise barriers against the upliftment of the poor.

Socially, rural poor may not be allowed by rural elites to congregate for achieving a common goal. They may be treated as lesser kind of human beings. The elites while not carrying out the social accountability may raise hurdles before the poor if the latter decide to protest against injustice. The poor are forced to cultivate culture of poverty so that they get alienated from the mainstream for development. Economically, rural poor are forced to reproduce dependent relations with the rich. The interlocking of land, labour and credit markets by the rich often deny the poor with their due share in markets. They cannot have stable sources of income if they do not have access to these markets. If a poor wants to defy the traditional settings, he/she is most likely to be deprived of this access. They may be forced to accept terms of wage, sharecropping, credit which are much below the average ones. Rural poor may be forced to cultivate the culture of poverty and live a subhuman life. If they want to recognize their separate cultural norms, the rural elites immediately intervene to bring them back to the original setting. The rural poor may be victims of violence in case they do not follow the order of traditional elites. As a


result of the inhibiting pressures of traditionalism, the rural poor-especially the rural poor women-have been gradually excluded from participation and thus are put to even greater disadvantages. However, if people get together under an organizational umbrella as Tagore experimented with, this state of hopelessness can surely change.

If we scan Tagore's vast intellectualized analyses and practical deeds we discern a lot of astonishing possibilities. Humanist feeling, emotion, sorrow, deprivation and dream-all touched Tagore in an amazing way. Insult to the peasantry, the frittering away of youth, the society's inner strength, the ties of kinship, the incompleteness and dangers of luxury and need, unprincipled politics, the bane of an absence of love, the inter-relationship of nationalism and internationalism, education and beauty grabbed Tagore's attention. Time has undoubtedly changed. It is changing even faster in these days. Yet Tagore's relevance is growing with the passage of time.

Rural Credit and Development Strategies

Rabindranath Tagore is the pioneer in advocating inclusive development approach in Bengal. He tried to bring the deprived segment of the population to the path of development. He encouraged them to be confident and productive to the society. Regarding his interests in broad-based rural development, Tagore has written, "I endeavoured all the time I was in the country to get to know it down to the smallest detail. The needs of my work took me on long distances from village to village, from Shilaidah to Patisar, by rivers, large and small and across beels, meaning marshy water ways, and in this way I saw all sides of village life. I was filled with eagerness to understand the villagers' daily routine and the varied pageant of their lives. Gradually the sorrow and poverty of the villagers became clear to me, and I began to grow restless to do something about it. It seemed to me a very shameful thing that I should spend my days a landlord, concerned only with money making and engrossed with my own profit and loss."(RR, vol.14, p.378)

While working for agricultural development in different zamindari estates in East Bengal, Tagore got a clear glimpse of the plight of marginalized farmers who had been burdened with loan from rural money lenders (Mohajon). Tagore observed that the arable land of the region was relatively infertile and there was only one harvest in a year; even crops were damaged due to natural calamities in some years. Therefore, farmers were compelled to take loans from money lenders (at a very high interest rate) to meet their emergency need. They also struggled to pay revenues to the zamindar (landlord). Rabindranath felt the sufferings of his subjects. The famous poem 'Dui Bigha Jami' reveals the fact that how money lenders used to oppress the helpless poor through the character 'Upen'.

'Of my land only a little remained, the rest having been mortgaged away.

The zamindar (Understand) said one day, "Know what, Upen? This too should come my way." I said, "O Lord, countless are the plots of land you already own, but consider I only have a land enough to bury me when I'm gone!

In six weeks I was forced out of my ancestral land into the road. By a court


decree, falsely it said, I had defaulted on a loan and owed.'

Hence, Tagore decided to establish co-operative bank to provide necessary financial assistance to the peasants. He thought that if these poor farmers could get rid of the clutches of money lenders they would be able to stand on their own feet, and get self-confidence as well.

Tagore believed that access to credit is a right to the poor. He took initiative to establish a 'Krishi Bank' at Shilaidah in 1894. Later on he established the same in Patisar in 1905. The main objective was to free the hardcore poor farmers from the grip of money lenders. Initially, Rabindranath arranged capital for the bank from his friends and relatives. After winning the Nobel Prize in 1913, Rabindranath donated the prize money to his school in Shantiniketan (Kripalani 2008: 162) and invested the fund (one lac eighty thousand rupees) in Patishar Krishi Bank (Karim 2004:176). This enhanced the capacity of the bank to facilitate more credit to the peasants at cheap interest (at twelve percent interest per annum) and the school received a fixed annual income. However, due to this initiative, money lenders around Patisar were compelled to close their business. They deposited their idle money in the bank (at nine percent interest per annum) and earned interest income. As such, the poor subjects became free from the clutches of money lenders. The bank continued until 1925. Indeed, no definite closing year has been found as yet. In fact, the bank was closed due to the enactment of 'Rural Indebtedness Act' which put embargo on collecting money from the subjects.

Tagore started microcredit program to finance rural development activities on co-operative basis (forming co-operative society) even before establishing the bank. He inspired poor farmers to build up the habit of small savings. Farmers of neighbouring villages would have to subscribe to the co-operative credit society. The funds so raised were given back as loan at small interests to the needy farmers. Tagore introduced such small co-operative initiatives both in Shilaidah and Patisar. Apart from this, microcredit was also provided for the development of various cottage industries.

Tagore believed that the root cause of rural destitution is lack of self-confidence of the people. Tagore stresses, "the most urgent need in our country is not to place begging bowls at their hands, but to make them confident of their own power, to make them realize that a man united with others is a complete entity, whereas an alienated individual is but a powerless fragment." (R.R. vol. 14, p.313)

Tagore's program of rural community development was based on twin principles of self-help and enlightenment. Rabindranath wanted to develop a comprehensive rural governance structure called 'Palli Samaj'(Rural Society) which encompassed multi-dimensional elements of societal upliftment. In 1908, he declared the sketch of the 'Palli Samaj' where main activities were proposed as follows : equity and good relation among different religious beliefs; solving disputes and differences by 'Salish' (one type of village court); introduction of home grown products, improvement of local industries; establishment of night schools and recruitment of competent teachers; maintaining ethical standard, unity, patriotism; establishment of hospital and


dispensary in every village; facilitating free medical treatment and medicine to the poor; ensuring availability of drinking water; expansion of rivers, roads, sports etc.; establishment of agricultural farm; facilitating training and education to young generation on agriculture and animal husbandry; establishment of 'Dharma-golas' (Grain Banks); expansion of cottage industries; development of woman entrepreneurs; prohibition of alcohol in the locality etc. The idea deserves to be examined more in-depth and replicated even in today's modern society. That indicates yet another shade of his relevance in contemporary crisis-ridden lopsided developmental world.

Tagore's thought of social reformation afterwards got the spirit of nationalism. He dreamt of a self-reliant homeland in his essay 'Swadeshi Samaj'. In one Swadeshi song, Tagore bows down his head to the soil of Bengal and speaks of his indebtedness to the motherland. He also suggests his favourite idea that a man is born to a particular land, but he is also born to the world. His motherland Bengal is a part of the Mother Earth. The text of this mellow song stands as follows in translation (by Aruna Chakravarti):

'Ah! the soil of my country!

I bow my head down to you,

For over you the goddess Earth,

Your mighty Mother, has spread her veil

in gentle protective care.'

(Goswami 2011:194)

Tagore persuaded the peasants of his estate at Patisar to organize themselves into a welfare community named as 'Kaligram Hitaishi Sabha' - a co-operative movement with sixty to seventy thousand people of 125 villages to look after social work in the locality. The Sabha raised its own fund, to which the Tagore estate contributed. People in general also donated willingly to the fund. It maintained schools, hospitals and other centres of common welfare and was self-governing in its constitution. Writing about the 'Sabha' to Lady Abala Bose (wife of the Scientist Sir J.C.Bose), Tagore summed up its activities : Arrangement has been made so that the villagers should be able to undertake welfare measures themselves by repairing roads, removing the dearth of water, settling their disputes by arbitration, establishing schools, clearing jungles, providing food against famines by setting up Dharma-golas (Grain Banks), etc., and in every way to contribute their own share in the welfare of the village to which they belong.'(Kripalani, 2008: 164-65) Within a few years, the organization succeeded in establishing elementary schools including English education in three areas, constructing local roads, digging wells for drinking water and providing primary healthcare to the poor.


Tagore was very keen to improve the traditional agricultural system by introducing modern technology and equipments in farming. He emphasized on the expansion of non-agricultural sector in rural areas, particularly to meet the increased demand resulting from rapid increase in population. Tagore also introduced crop rotation and crop diversification in agricultural production. He imported mechanised ploughs and improved seeds to enhance the agricultural productivity and thus increase the income of peasants. He brought 7 mechanised ploughs from Kolkata and improved seeds of maize from the USA and fine paddy from Madras to Patisar. Tagore arranged training for the peasants since they were ignorant about modern method of farming. Though the traditional then was that, the elites were to go to Oxford or Cambridge for higher education, Tagore sent his son Rathindranath, son-in-law Nagendranath Gangopadhaya and son of a friend Santosh Majumdar to the University of Illinois, USA to study agricultural science and technology and animal husbandry so that they could disseminate advanced knowledge on farming to farmers. Tagore believed that being agriculture based country, Indian should acquire knowledge to become a 'developed peasant' rather than a 'developed gentleman'. After coming home, Rathindranath devoted himself in modern farming at Patisar. He drove tractors in the field and also trained the farmers with advanced methods of farming. A New York lawyer Myron Phelps was surprised to find a modern agricultural farm of Rathindranath in India. He termed it as successful as an American farm. (ibid, p.163)

Tagore termed his rural development initiatives as a comprehensive development approach including socio-economic, cultural and political affairs. Sriniketan was the appropriate statue of Tagorean thought. While visiting the United States of America, Rabindranath met Leonard K. Elmhirst, a British young agricultural scientist who agreed to collaborate with him to establish the department of rural reconstruction at Sriniketan. Elmhirst joined as the Director of the Institute of Rural Reconstruction established in 1922 that attempted to realize the dream of the poet. The work that started in Shilaidah and Patisar found here its culmination. Sriniketan programme covered four general areas : agriculture, crafts and industries, village welfare and education. The poet tried to reconstruct the rural life in such a way that people would achieve self-reliance and self-respect through revitalizing rural economy. Rabindranath termed the aims of Sriniketan as: "The objective of Sriniketan is to bring back life in its completeness into the villages, making them self-reliant and self-respectful, acquainted with the cultural tradition of their own country and competent to make an efficient use of modern resources for the improvement of their physical, intellectual and economic conditions." (Karim, 2004: 255)

In 1927, Visva-Bharati Central Co-operative Bank was established with the jurisdiction over three southern Birbhum thanas covering an area of three hundred square miles and a population of two lakhs (Palit et al. 2009). A total of two hundred co-operative societies were established in this area for agricultural credit, irrigation, granaries etc. Apart from co-operative banking, the revival of cottage industries and crafts had been a major goal of Sriniketan. The main intention of the poet was to develop an alternative earning source since the arable land became tiny with increased population. Training centres were set up to restore local industries and crafts such as leather work, tailoring,


carpentry, etc. A separate unit named 'Shilpa Bhaban' started in 1922 to provide vocational training to rural apprentices and crafts training to the students of academic departments of Santiniketan and Sriniketan. The medical section looked after the sanitation and health condition organizing local health societies. Villagers used to become the member of the samities. Initially maternal and child health was an important components of the health care services. Rural women were trained to provide such services to mother and children.

Rural Development in Bangladesh

We can interpret our national spirit in light of Tagore's thought. Unity may be termed as social power, which is in fact social capital as Rabindranath solicited. In 1971, we saw how people were united to face the challenges. We overcame and got independence under the leadership of Bangabandhu Sheikh Muzibur Rahman. After independence, Bangabandhu established 'Bangladesh Krishi Bank' to facilitate credit to the peasants. Like Rabindranath, he was also a farmer-friendly personality. The present Government also has taken steps to improve the living condition of peasants and revitalize the rural economy. A popular project named 'ekti bari ekti khamar' (one home, one farm) has already been implemented very successfully to ensure comfortable living for the poor. The price of fertilizer has been reduced and diesel subsidies for irrigation have been extended to the farmers to increase agricultural production.

As the monetary authority of the country, Bangladesh Bank (Central Bank) has taken farmer-friendly monetary and agricultural credit policies for facilitating credit to marginal farmers in line with the Tagorean thought. A total of Taka 12 thousand 500 crore of agricultural credit has been disbursed (annually) by different commercial and specialized banks. A refinance scheme for Taka 500 crore has been launched for the first time in Bangladesh for the share-croppers. Crop diversification and cluster based production approach has been introduced. Import substitution food production has been given priority in order to be self-sufficient in food production. High value crops (Baukul i.e. innovative plums for example) in the northern region and spices are now produced to a large extent in the hilly areas of the country. To broaden financial inclusion, Bangladesh Bank has taken initiatives to bring the deprived population under banking services. About one crore farmers have already opened bank account in different banks at a cost of Tk. 10 only. Hence, they are getting agricultural loan, subsidies etc. directly to their bank accounts. Mobile banking has been introduced. Therefore, people particularly in rural areas do not need to go to the bank branch physically. They are now able to make transactions and also receive remittances from their relatives working abroad through using mobile phone technology.

Apart from agricultural credit, Bangladesh Bank has also taken steps to revitalize rural economy through injecting credit to non-agricultural income generating activities in rural areas as Tagore did. Bangladesh Bank has formulated SME policy. A total of Taka 45 thousand crore of credit has been disbursed (annually) by different commercial and specialized banks for the development of small and medium industries, particularly handicrafts, handloom, cottage industries as Tagore introduced hundred years ago in the


neighbouring villages of Sriniketan. Besides, Bangladesh Bank facilitates special refinance scheme for small and medium enterprises (SMEs). Women entrepreneurs and ethnic groups are given priority in the refinance schemes of Bangladesh Bank. Cluster based production approach has been introduced for the rapid expansion of SMEs. Meantime, Jamalpur and Bogra have been developed for handicrafts and light engineering respectively.

Apart from this, NGOs and micro-finance institutions (MFIs) have been providing microcredit to the hardcore poor in rural areas for the improvement of their livelihood. To facilitate these activities, Microcredit Regulatory Authority (MRA) has been established headed by the Governor of Bangladesh Bank. MRA has already formulated rules and regulations to ensure well functioning of the rural development activities through its stakeholders. All these initiatives are directed to become self-reliant as a nation to face the challenges in the days to come as Tagore thought hundred years ago.

Conclusion

Tagore believed that rural people were not fully responsible for their misery as they had always been exploited by capitalists whose policy was to pave the way for a lasting poverty. Therefore, poverty remains a matter of ever concern. The discrimination had been created due to inequity prevailing in the society. The elites captured the assets exploiting the rural people, and pooled their assets in urban areas. Tagore warned about the harsh consequence of such trend in 'Gitanjali' in the following way:

'Those whom you push down will chain you down.Those whom you leave behind will pull you behind.The more you envelop them under darkness of ignorance, the more distant will your own welfare be!' ('Gitanjali':108)

As zamindar, Rabindranath was very successful and favourite to his subjects. Tagore believed that if he could reconstruct one or two ideal villages that would be a model for the entire India. Tagore has written, "I cannot change the entire country alone. I shall conquer only one or two small villages…If I can grant release from the bonds of ignorance and helplessness to only two or three villages, a small prototype of India will be constructed there." (RR, vol. 14. p.380). It is now widely felt that even though traditionalism can 'hinder' development (as some would claim), there are strengths in tradition as well, especially in dynamic tradition. The society which can absorb shocks of change and can organize people in groups for better living cannot be looked down as 'traditional'. There is a growing awareness of the need to reconcile the values of 'universal' and 'diversity' a conviction that Tagore pioneered not only in thought but also in his life of action. Rabindranath was never indifferent to the need, and he tried hard to make a difference with whatever constructive work possible for him. We can try to make his legacy a reality in our individual life as well.

From that context, Tagore stands relevant even today and also as a source of inspiration for change in our society. Indeed, the rural Bangladesh (also West Bengal) has been changing fast in terms of socio-economic upliftment by incorporating both organizations and technologies. These are the elements of changes which Tagore also strived for so sincerely.


References

Brody, A. 1985. Slowdown - Global Economic Maladies. London: Sage Publications Ltd

Choudhury, M. 2010. Haunting Rays Tagore Miscellany (First edition.) Dhaka : Ittadi Grantho Prokash

Goswami, K. 2011. The Art of Tagore Songs (First edition.) Dhaka: Shahitya Prakash

Haq, M. 1997. Human Development in South Asia, New Delhi: Oxford University Press

Karim, A. 2004. Palli Unnayane Rabindranath (First edition.) Dhaka ? Prokashon

Kripalani, K. 2008. Rabindranath Tagore - A Biography (Revised edition.) New Delhi: UBSPD

Palit, C., M. Mitra and K. Banerjee (eds.) 2009. Rural Reconstruction and Rabindranath (First edition) New Delhi: B.R. Publishing Corporation

Rahman, A.1987. Dual Role of Tradition in Social Mobilization: The Grameen Bank and Rural Poor Women in Bangladesh, Dhaka: BIDS

Sen, A.1981. Poverty and Famines, New Delhi : Oxford University Press

Tagore, R.1410. Rabindra Rachanabali (Revised edition), vol. 6, Kolkata: Visva Bharati

Tagore, R.1410. Rabindra Rachanabali (Revised edition), vol. 14, Kolkata: Visva Bharati


Alternative Sources of Finance for Small and Medium Enterprises*

For quite some time now, SMEs in Bangladesh have been referred to as the 'missing middle' neither small enough for micro-credit from MFIs nor big enough to be considered bankable by lenders in the formal financial sector; although successful SMEs are important sources of output, income and employment. Unlike large industrial or commercial undertakings, SMEs generate employment with much lower capital outlays. Neglect of this important source of output and employment growth remained a major market failure for our formal financial sector. Growth potential of promising SME undertakings started with equity investment from personal or family savings remained hamstrung by little or no access to financing from the formal financial markets.

BB's financial inclusion drive is working to redress this market failure, engaging all commercial bank and financial institutions in a comprehensive countrywide SME credit promotion program. The just launched online CIB services of BB will facilitate SME financing activities in faster and more transparent manner. Appreciating the growth and employment generation potentials of SMEs, external development partners like IDA and ADB have come forward with funds to provide refinance support to lending institutions financing SMEs. The Government of Bangladesh is also fully committed to support development of SMEs, with financial as well as technical/business know-how support through SME Foundation and other departments/agencies.

There is however more that can and need be done in further developing financing support facilities for SMEs. Instead of loans to be paid back regardless of whether an undertaking succeeds or fails, many SME entrepreneurs may prefer equity participation which requires payoffs to equity partners in good times but no payment in loss situations. Also, in developed financial markets there are entities extending short term mezzanine and/or bridge financing to distressed businesses to tide over adverse situations. In Bangladesh, loan defaults in adverse business conditions shut the door of badly needed further loan from formal lending institutions; mobilizing additional equity in such

*Seminar on 'Alternative Sources of Finance for Small and Medium Enterprises', organized by DCCI and SEAF Ventures Management LLC, 20 July 2011.


Alternative Sources of Finance for Small and Medium Enterprises*

For quite some time now, SMEs in Bangladesh have been referred to as the 'missing middle' neither small enough for micro-credit from MFIs nor big enough to be considered bankable by lenders in the formal financial sector; although successful SMEs are important sources of output, income and employment. Unlike large industrial or commercial undertakings, SMEs generate employment with much lower capital outlays. Neglect of this important source of output and employment growth remained a major market failure for our formal financial sector. Growth potential of promising SME undertakings started with equity investment from personal or family savings remained hamstrung by little or no access to financing from the formal financial markets.

BB's financial inclusion drive is working to redress this market failure, engaging all commercial bank and financial institutions in a comprehensive countrywide SME credit promotion program. The just launched online CIB services of BB will facilitate SME financing activities in faster and more transparent manner. Appreciating the growth and employment generation potentials of SMEs, external development partners like IDA and ADB have come forward with funds to provide refinance support to lending institutions financing SMEs. The Government of Bangladesh is also fully committed to support development of SMEs, with financial as well as technical/business know-how support through SME Foundation and other departments/agencies.

There is however more that can and need be done in further developing financing support facilities for SMEs. Instead of loans to be paid back regardless of whether an undertaking succeeds or fails, many SME entrepreneurs may prefer equity participation which requires payoffs to equity partners in good times but no payment in loss situations. Also, in developed financial markets there are entities extending short term mezzanine and/or bridge financing to distressed businesses to tide over adverse situations. In Bangladesh, loan defaults in adverse business conditions shut the door of badly needed further loan from formal lending institutions; mobilizing additional equity in such situation also becomes very difficult, if not impossible.

*Seminar on 'Alternative Sources of Finance for Small and Medium Enterprises', organized by DCCI and SEAF Ventures Management LLC, 20 July 2011.


In this context of gaps and missing dimensions in our developing financial market, I am much heartened to see SEAF VM stepping in as a venture capital window for the SMEs in Bangladesh. With global presence of SEAF VM in 22 countries, I believe its cross-country experiences will be helpful in devising local solutions addressing specifically local issues arising in SME venture capital financing in Bangladesh. We at BB will be happy to provide SEAF VM such support as may be relevant in its objective of widening the equity financing alternative as a financing option for SMEs in Bangladesh.


Mobile Banking*

The first and foremost task of the banks and financial institutions is to provide financial services and there is no alternative to use technology-driven business models to ensure better and faster services to their clients. As a result, Bangladesh Bank has formulated a 5-year strategic plan for the financial sector based on advanced technological applications to deliver services with utmost efficiency. To achieve the goal of modernizing the banking system of Bangladesh, we have already introduced on-line banking, e-commerce, automated clearing house, Bangladesh Electronic Fund Transfer Network, Online CIB and today's mobile banking program; a great stride towards modernization. Moreover, Bangladesh Bank has formulated the modern guide lines to make the bank-led mobile banking services more transparent and better-conducted.

Mobile banking is an alternative service to branch banking, which enables financial services at the doorstep of the unbanked population of the society. It is actually an online banking service. On the other hand, rapid growth of mobile phone user and wider range of the coverage of mobile operator's network make their delivery channel a significant tool for extending banking services to both of the unbanked and banked population of the country.

With a view to facilitating the banking services to the common people, 12 banks have already launched their mobile banking activities till today with the approval of BB. Mobile banking service offers people basic banking and financial services such as payment of inward remittances, withdraw a land deposit of cash from bank branches, ATM and mobile operator outlets, payments of utility bills, payments for purchasing goods and services, payments of salaries of corporate officials, industries and factories and other offices, payments of allowances and pensions, fund transfers, immediate mobile balance recharging and so forth. It ensures banking services at any time at any places around the country and will help to promote savings habit among the common people. It will allow speedy and cost-effective money transaction and facilitate access to modern banking services leading to increased fund flow

*Inauguration of Mobile Banking Program by BRAC Bank at Radisson Water Garden Hotel, Dhaka, 21 July 2011.


particularly in the rural areas and consequently domestic demand will be enhanced due to development of rural economy. And as a result, there all basis for attaining participatory growth, a pre-requisite of development for all will be more expanded.

I would like to thank BRAC Bank authority for taking initiatives to facilitate formal financial services for banked and unbanked people through mobile phone incollaboration with US based institution 'B-kash'.So far I know B-kash has been conducting its business plan and social uplifting activities with good reputation expanding access to financial services capitalizing the factors like universal wireless network coverage, widespread personal ownership of mobile phones, a cash economy and a favorable regulatory environment. I am learned that the B-kash mobile wallet will be an account of the customer which will be used for withdrawal and deposit of money and also for various purposes. The customers will be able to receive salary, loan, domestic remittance and other disbursements in their B-kash accounts through electronic system via B-kash agents throughout Bangladesh. I have already asked the concerned regulator to ensure the expected inter-operability among all mobile operators as soon as possible with a view to make the total activities more customers friendly. I hope all operators will respond sincerely to this urge for their own interest.

Bangladesh Bank has already formulated the operating guidelines to be followed by the commercial banks in order to ensure the banking facility for the unbanked people through mobile phone network and the guidelines will be finalized very soon. The purpose of the guide lines is to provide regulatory framework for the banks and financial institutions which will create an enabling environment for innovations in financial services, to minimize the usage of cash and its associated costs and to promote accessibility to formal financial services especially to the poor and unbanked population at an affordable cost.

In fact, inclusion of technology in the banking services does augment the speed of poverty elimination. Modern banking system could be brought within the cost limit of the people by the usage of technology. At the same time when banking activities become easier, the savings tendency of people also increases. I want to say again that mobile banking system is safer, swiftly resolvable and obstructive of fraudulence. That is why, I urge banks to extend their customer services using the utility of modern technology like mobile banking.


SME Technology*

A vibrant SME sector is a strong engine for economic growth which contributes to job creation and stimulates entrepreneurship. The Bangladesh Bank and the financial sector in general is highly supportive of the SME sector. We have three ways that we are encouraging SME growth which I wanted to share.

The first is by creating a stable macro-economic environment conducive to private sector growth. Rapid economic growth and a consistent macro-policy stance are essential for the success of small entrepreneurs and our economy is providing this platform. Indeed, our macro-economic fundamentals are much stronger that often perceived. The central bank for its part is steadfastly anchoring its monetary policy to curb inflation by reducing reserve money and broad money which will ease the headline inflation numbers in the coming months. On the external reserves side while there are pressures due to the high fuel import bill, it is compensated by our large build-up of domestic food stock-piles which will mean a more moderate food import bill.

The second way we are supporting the sector is through a refinancing facility called a SME fund which we use to provide concessional funds to commercial banks and other financial institutions to then on-lend to SME firms. We have so far disbursed over 1761 crore taka through this facility. I should also use this opportunity to dispel the notion that these sorts of lines of credit contribute to reserve money growth and therefore inflation. In fact, this line of credit is foreign financed and as it is not the Central Bank's own funds these lines of credit they contribute to growth but not inflation.

Our third vehicle of supporting this sector is through our encouragement to commercial banks to invest in this sector. Bangladesh Bank has already issued an elaborate SME guideline. The guideline prescribes on 'cluster/area approach' in identifying and utilizing specific comparative advantages of different regions for diverse range of SME activities. Bangladesh Bank has already identified several clusters like light engineering and agricultural machinery cluster in Bogra, handicraft cluster in Jamalpur, indigenous Monipuri Tant (Handloom)

*Inauguration of SME Technology Fair jointly organized by IIDFC, Bangladesh and NSIC, India, 9 October 2011.


cluster in Moulavibazar and many others where we have engaged specific banks to look after the financing need for the cluster entrepreneurs. Last year SME lending constituted 21% of total bank lending and I am sure that will increase as our efforts to improve financial inclusion pay-off.

Bangladesh success story is indeed the success story of the entrepreneurs. They are the symbols of our self-development, they are our pride. The products of our innovative entrepreneurs have been moving out to the world at large. At the same time the image of enterprising Bangladesh is getting brighter day by day.

I appreciate the initiatives taken by IIDFC and NSIC to organize this technology fair. I hope these initiatives will bring the two neighboring nations' SME stakeholders to work closely and in a win-win situation where both countries will be benefited. I am pleased to know that as many as 40 small and medium entrepreneurs from India are participating in this fair. I am sure the Bangladeshi entrepreneurs will find this fair very useful in sharing their experiences with the Indian counterparts and find ways to work together for effective economic cooperation between the two countries in the SME sector in the forms of potential joint venture and mutual product exchanges through bilateral trading mechanism. I am also happy to see that the fair is technology focused as only transfer of this can add more value to SMEs, particularly the manufacturing ones. This will also help to develop our export capability in the SME sector, which will further diversify our export base.


SME Market Segmentation Database*

As many of you know but I never get tired of repeating this, we have managed to halve poverty in the last twenty years, with poverty falling from 59% in 1990 to 31% in 2010. This is the ultimate measure of success of the pro-poor economic growth approach undertaken during the last two decades. Bangladesh Bank has also used its policies and financial resources to support this pro-poor growth process by ensuring adequate credit flow for productive investments and promoting financial inclusion policies. One example which is relevant here, is our support to the small and medium enterprise (SME) sector which I will discuss more in a few minutes. The economic and social importance of the SME sector is well recognized all over the world for its contribution in achieving several socio-economic objectives. The SME sector typically possesses certain key advantages. They are the largest source of domestic employment across all economic sectors, in both rural and urban areas. It plays a vital role in keeping a check on rural-urban migration by providing villagers and people living in isolated areas with a sustainable source of local employment and fostering new entrepreneurship.

The SME sector also provides opportunities for women, youth and marginalized sections of society, to participate in the economic development of the country. Indeed SME are the key drivers of our robust home market which has been continuously expanding and helping us in coping with the on-going global financial crisis. These factors ensure a more equitable distribution of national income and ensure a more effective mobilization of resources which might otherwise remain unutilized. However globally the SME sector is confronted with a wide-range of challenges limiting its growth and Bangladesh is no exception in this regard.

Lack of adequate and affordable access to finance is a common major constraint for the growth of SME sector. However in recent years the Bangladesh Bank has made significant progress to bridging this gap through two mechanisms. First, we are supporting the sector through a refinancing facility

*Launching of SME Market Segmentation Database at Bangladesh Bank on 23 November, 2011


called a SME fund which we use to provide concessional funds to commercial banks to then on-lend to SME firms. We have so far disbursed over 1761 crore taka through this facility. I should also use this opportunity to dispel the notion that these sorts of lines of credit contribute to reserve money growth and therefore inflation. In fact, this line of credit is foreign financed and so since it is not the Central Bank's own funds these lines of credit are a win-win solution - they contribute to growth but they do not contribute to inflation.

Our second vehicle for supporting this sector is through our encouragement to commercial banks to invest in this sector. Bangladesh Bank has already issued an elaborate SME guideline. The guideline prescribes 'cluster/area approach' in identifying and utilizing specific comparative advantages of different regions for diverse range of SME activities. Bangladesh Bank has already identified several clusters like light engineering and agricultural machinery cluster in Bogra, handicraft cluster in Jamalpur, indigenous Monipuri Tant (Handloom) cluster in Moulavibazar and many others where we have engaged specific banks to look after the financing need for the cluster entrepreneurs. Last year SME lending constituted 20% of total bank lending and I am sure that will increase as our efforts to improve financial inclusion pay off.

There are still other constraints to the SME financing in Bangladesh. One such impediment to SME financing is the lack of statistical data and current information on the features and behaviors of SMEs as potential clients. Banks and other Financial Institutions need regularly updated information to design SME strategies, budgeting, reviewing and monitoring performance status and taking timely corrective measures.

This morning, we are going to witness a significant achievement in the development of our SME sector - the inauguration of the SME Market Segmentation Database. The main objective in adding this facility is to facilitate statistical data gathering, strengthening of internal processes, reduction of paper work, generate specified standard reports and making credit decisions, by banks and non-bank financial institutions. The database is expected to provide more information, much more quickly in a standardized format. Of course the real test of the success of the database is the extent it generate useful information to decision-makers and the extent it then gets used. We will monitor this closely and I strongly encourage you, as users, to provide feedback on which parts of the database you find most useful and which parts need further fine-tuning. Banks and Financial Institutions should extend their helping hand by providing all the information needed in implementing this database fully. CIB succeeded mainly because of your co-operation.


Role of Central Banks in Financial Inclusion*

The world economy only just coming out of a downturn triggered by the global financial crisis is showing indications of slipping yet again into another slowdown, this time precipitated by the European debt crisis. Crippling credit crunch from the earlier slowdown still lingers for small businesses and new startups even in mature developed economies like the US and UK; and without appropriate policy interventions their difficulties will be prolonged and worsened further by the looming new slowdown. In our South Asia region the basically urban big business focused financial markets have not developed adequate capacities of reaching out to meet the financing needs of micro and small scale farm and non-farm productive undertakings, leaving these productive segments of economy underserved or unserved, at substantial cost in forgone pace of growth and poverty reduction. It is clearly the onus of central banks as financial sector regulators and supervisors to redress this failing, with well conceived financial inclusion initiatives. Bangladesh Bank's initiatives in this direction during the global financial crisis served the Bangladesh economy well in upholding employment, output and domestic demand; helping it sail through the global turmoil with only modest growth slowdown. The looming new global economic slowdown adds urgency to pursuing the financial inclusion initiatives, in Bangladesh and elsewhere in South Asia.

Up until the later decades of the last century, directed lending from a predominantly state-owned banking system was the main mode of channeling credit flows to underserved sectors like smallholder agriculture, micro and small businesses, in Bangladesh and other South Asian economies. Dwindling market share of state-owned banks has eventually rendered this approach ineffectual, with only half-hearted and non-committal engagement of the solely private gain oriented privately owned banks in lending based on social need driven priorities. Against this backdrop BB's financial inclusion drive has substituted directed lending with Corporate Social Responsibility (CSR) driven financing of productive undertakings of the underserved population segments, supporting inclusive socio-economic growth equitably opening up advancement

*Inauguration of SAARC FINANCE seminar on 'Role of Central Banks in Financial Inclusion', Hotel Ruposhi Bangla, Dhaka, 20 December 2011.


opportunities for all. Back in June 2008, BB issued a guidance circular urging and encouraging all banks to embrace and mainstream CSR obligations in their corporate goals, objectives and ethos; inter alia making financial inclusion their consciously and spontaneously adopted approach of socially and environmentally responsible lending. Experience with this approach thus far has been encouraging, with all banks enthusiastically taking up multifaceted initiatives widening and deepening financial inclusion; such as extending branch and ATM networks into rural areas, mass scale opening of no-frills bank accounts with nominal deposits for poorer people (more than nine million such new accounts opened by now), adopting new cost saving remote delivery modes for financial services like mobile phone/smart-card based banking, financing schemes for renewable energy generation projects and so forth. BB has supported these initiatives by putting in place necessary enabling infrastructure, including a fully automated interbank clearing and settlement platform for paper based and electronic payment instruments, an upgraded online credit information bureau, and some refinance lines for banks against their SME and environment focused lending. The refinance lines are modest, consistent with BB's announced monetary policy stance.

While promoting financial inclusion with appropriately designed initiatives, the banks and the supervision authorities will of course need to keep eye on proper risk management in the newer areas of lending expansion; to protect financial stability by preserving the desired standards of asset quality. Transparency and fairness in pricing of financial services for micro and small enterprises are also important issues from consumer rights protection viewpoints. For this, a Consumer Interest Protection Center (CIPC) has already been activated, with a hotline (16236) and other electronic connectivities to address consumer grievances and to monitor their satisfaction levels. Together, these diverse initiatives of the banks and BB are enhancing the image of our financial sector as humane and socially responsible.


Access to Finance and Technology Upgradation for SMEs: Bangladesh Perspective*

The role of Small and Medium Enterprises (SMEs) is indispensable for overall economic development of a country particularly for developing countries like Bangladesh. SMEs are the growth engines of any economy due to their ability to create jobs, foster entrepreneurship and to provide depth to the industrial base of the economy. This labor intensive sector is also capable of achieving Millennium Development Goals (MDGs) especially eradication of extreme poverty, hunger, gender equality and women empowerment. SME sector has played a vital role in economic development of some prosperous countries of Asia. Our neighbouring and nearest countries like India, Pakistan, Sri Lanka, Malaysia, Taiwan, Korea have also been concentrating their efforts in developing SME sector. There is a ministry named 'MSME' in India and a separate SME department in the central bank of Pakistan. Besides, SMEs have been playing key role in providing impetus to the development of Japan, China and Hong Kong. The present government has also put emphasis on the development of SME sector considering it as 'the driving force for industrialization'.

A strong, dynamic and efficient SME sector obviously holds the key to the sustainable economic development and industrialization. SME plays a vital role in checking rural-urban migration by providing people living in isolated areas with a sustainable source of local employment and fostering new entrepreneurship. SME sector may provide opportunities for women and the youth including the most vulnerable and marginalized sections of society, minorities and other disadvantaged groups to participate in the economic development of the country. These factors ensure a more equitable distribution of national income and ensure a more effective mobilization of resources which might otherwise remain under-utilized. Thus SME sector is instrumental in achieving inclusive growth.

In most of the developing countries, including Bangladesh, lack of adequate access to finance is considered as one of the major constraints to the growth of

*Seminar on 'Access to Finance and Technology Upgradation for SMEs: Bangladesh Perspective' organized by FBCCI, 23 December 2011.


SMEs. The other key issues affecting the SMEs in the country include lack of access to technology and market, lack of entrepreneurial capacity, management expertise, skilled manpower, promotional support service etc. However, the Bangladesh Bank (BB) and the financial sector in general are highly supportive of the SME sector. BB has already taken a number of structural and policy measures to increase the SMEs' access to institutional finance.

A dedicated 'SME & Special Programmes Department' has already been established in BB to promote SME sector. Subsequently, Bangladesh Bank has strengthened the monitoring system of SME credit activities. An elaborate SME guideline has already been issued which prescribes on 'cluster/area approach' in identifying and utilizing specific comparative advantages of different regions for diverse range of SME activities. BB has already identified several clusters like light engineering and agricultural tools cluster in Bogra, handicraft cluster in Jamalpur, indigenous Monipuri Tant (Handloom) cluster in Moulavibazar, small garments industry cluster in Syedpur and many others where we have engaged specific banks to look after the financing need for the cluster entrepreneurs. Access to finance and the necessity of technology in SME sector have also been prescribed in the guideline. Last year SME lending constituted 21% of total bank lending and I am sure that will increase as our efforts to improve financial inclusion pay-off.

BB is supporting and facilitating SME sector through refinance lines for banks and financial institutions against their SME loans. The current size of revolving refinance lines managed by BB is Taka 16.18 billion and another Taka 3.9 billion is being expected to be added to this amount from JICA soon. We have so far disbursed over Taka 19.31 billion to 21,191 entrepreneurs through this credit line. I should also use this opportunity to dispel the notion that these sorts of credit lines contribute to reserve money growth and therefore inflation. In fact, this line of credit is foreign financed, provides a win-win solution contributing to growth without fueling inflation.

I deem, lack of technological development in SME sector is one of the other fundamental problems which must be addressed. As a consequence of globalization, the requirements for SME development have been changed. In order to survive in this changed situation, the SMEs must be competitive and also have to use and develop new technology effectively. Technological upgradation is indispensible if we want to make our enterprises competitive because without competitiveness we cannot exist as we are not insulated from the global competition. So we should enhance productivity and competitiveness of SMEs through the effective application of technologies and related resources. In this context an organization like FBCCI can play a vital role for technological upgradation. I hope that FBCCI will give their attention to this issue and at the same time to the marketing of products produced by small entrepreneurs.


Bangladesh Bank is closely working with the Government and other stakeholders in developing SME sector. I usually say that the Bangladesh success story is indeed the success story of the entrepreneurs. They are the symbol of our self-development, they are our pride. The products of our innovative entrepreneurs have been moving out to the world at large. At the same time the image of enterprising Bangladesh is getting brighter day by day. The process has started and we will see a vibrant, dynamic and technologically developed SME sector in Bangladesh in the near future. I believe that SME and the nation will grow together. And FBCCI will have to play a leading role in this drive.


Mobile Banking*

Safe and efficient payment systems are fundamental to promote financial stability. Considering the importance of having a state-of-the-art payment and settlement system, Bangladesh Bank (BB) has been actively working to implement a modern payment and settlement system in Bangladesh. To achieve this goal of modernizing the banking system of Bangladesh on-line banking, e-commerce, automated clearing house, Bangladesh Electronic Fund Transfer Network, on-line CIB have already been introduced.

The rapid growth of mobile phone users and the wider range of the coverage of mobile operators' network make their delivery channel a significant tool for extending banking services to both banked and unbanked population in Bangladesh. All of you know that mobile phone operator 'Grameenphone' led the expansion of mobile phone providing an extended network of 37.5 million customers across the country. Today they are participating in another innovative activity with equal importance as a facilitator, providing network connectivity potentially to millions of unbanked people, to have access to basic financial services. With a view to facilitating the financial services to general people, BB has given approval to 16 banks for mobile banking activities till date. Among them, six banks have launched their activities. In this context, I want to mention that BB has already formulated the operating guidelines for the commercial banks in order to ensure the banking facility for unbanked people through mobile phone network. The purpose of the guidelines is to form a regulatory framework for providing financial services through mobile phones which will create an enabling environment for innovations in financial services.

Some basic banking and financial services such as payment of inward remittance, withdrawal and deposit of cash from bank branches, ATM and mobile operator outlets, payments of utility bills, payments for purchasing goods and services, payments of salaries of corporate officials, industries and factories and other offices, payments of allowances and pensions, fund transfers, immediate mobile balance recharging etc. are easy to be provided with the support of mobile phone technology. Yet there are opportunities to extend the limited financial service process. Certainly time will come when it

*Launching of bKash Services for Grameen phone Customers, 18 January 2012.


will ensure financial services at any time at any place around the country and will help to promote savings habit among the common people. It also will ensure speedy and cost effective money transaction and increase fund flow particularly in the rural areas. Domestic demand will be enhanced due to development of rural economy. As a result, the real basis for attaining participatory growth, a pre-requisite of development for all will be more expanded.

It is really praiseworthy that Grameenphone has initiated in collaboration with US based institution 'bKash' a bank-led mobile banking initiative, to facilitate formal financial services for their customers. I would like to thank bKash and Grameenphone authorities cordially. So far I know bKash has been conducting its business plan and social uplifting activities with reputation expanding access to financial services capitalizing the factors like universal wireless network coverage, widespread personal ownership of mobile phones, a cash economy and a favorable regulatory environment. I have also been informed that in less than six months bKash established distribution in every district of Bangladesh exceeding over 4,000 agent points and got an ever increasing customer base which has already reached 80 thousands. Along with already existing partnership with Robi, bKash is launching bKash-Grameenphone partnership which will enable providing financial services to the largest bases through mobile phones.

In fact, poverty elimination is possible through inclusion of technology in the banking services. As a consequence of using technology, developed banking services come within the cost limit of the people; at the same time when banking activities become easier, the savings tendency of people also increases. I invoke all concerned to extend financial services using the utility of modern technology like mobile banking. And thus we will get the opportunity to materialize our dream of reaching the doorstep of common people with financial services.

Imagine a world where money doesn't change hands! Where there is no need to hurry to the nearest bank branch. Where you don't need to carry cash, cards or write cheques. Where you don't have to worry over sending or receiving money to and from your loved ones. Imagine a future where you don't have to have a fancy bank account to prove your worth. A future where all you need, to be a part of the "global" economy, is a simple mobile phone which you can afford.

Such future is truly in our hands. And the future is now, this moment! To build up such future, today bKash has launched a programme to provide financial services for Grameenphone customers. I hope bKash authority will ensure safe, risk free, low cost and user-friendly financial services for the customers.


Developing Medium and Long term Credit Market for SMEs*

Bangladesh Bank is working relentlessly for the development of SME sector over the last three years. To make the banking system of the country entrepreneur friendly and to develop women entrepreneurs, the central bank of the country has undertaken multi dimensional initiatives and is working for their implementation. During the last few years, we observed that SME financing has been expedited due to the efforts of Bangladesh Bank. Banks and Non Banking Financial Institutions have come forward with a view to financing more to SME sector than before. At present, various projects financed by ADB and World Bank for the development of SMEs sector are under the implementation process of Bangladesh Bank.

Bangladesh Bank identifies the gap created due to the inconsistency of the term between the deposit and investment fund of the banks and financial institutions in case of mid and long term finance in the small and medium enterprises of the country and takes initiatives for creating financial market for mid term and long-term investment in the SME sector by providing primary fund. In this regard, an agreement has been signed between the Bangladesh government and JICA on 18 May 2011. Under this project, Japan government will provide assistance amounting to five thousand million Yen for the development of mid-term and long-term credit market in SME sector and for developing skills of Bangladesh Bank and participating banks and financial institutions.

I like to invite your attention on three aspects of this project. These are:

J Finance will be available at bank rate (at present 5%) from this fund to make the banks and financial institutions capable to provide loan for mid and long-term (i.e. minimum 2 years and maximum 8 years) in order to feed the production-oriented investment demand of the small and medium entrepreneurs,

J Financing will be ensured within two weeks according to the choice of banks and financial institutions on the basis of two types of model namely Pre-finance and Re-finance.

*Participation agreement signing ceremony under JICA assisted FSPDSME project on 'Developing Medium and Long term Credit Market for SMEs', 11 June, 2012.


J Under the project, in case of loan disbursement banks and financial institutions can fix their interest rate on the market basis; but they can't impose any secret fee/charges. Financing banks and financial institutions will be bound to inform the real cost of loans to the project authority and entrepreneurs.

I hope the features of the project will be attractive to banks and financial institutions and the entrepreneurs will also be benefited. Besides these, under the technical assistance component of the project, this project will be helpful in developing banks and financial institutions' efficiency on SME banking management which is really appreciable. The project has already commenced its operation to assist medium and small entrepreneurs to invest in medium and long term through supplying capital to the commercial banks and overall to ensure the contribution of medium and small entrepreneurs in case of the development of the country's productivity. Competent 41 banks and financial institutions will begin its Participatory Financial Institutions (PFIs) function through the participatory agreement signing procedure in order to fulfill the precondition of participation in the project. I am requesting skilled and interested banks to play the pioneer role to increase the finance in productive investment projects of the SME entrepreneurs by using the opportunity offered by the JICA.

I believe that if the project is implemented, medium and long term credit market will be developed in the SME sector of the country which will play an important role in removing the finance crisis in the SME sector.


Enabling Environment for Integration of SMEs in Global Value Chains*

The Perspective and Five Year development plans of the government see SMEs as key instruments for hastening inclusive growth and poverty eradication with broad based promotion of output, employment and income.

It is heartening and reassuring to see UNESCAP sharing the same view, proactively taking up a value chain analysis of selected SME sectors in Bangladesh, Nepal and Sri Lanka to identify ways of helping SMEs realize their export potentials by integration in global value chains. The study has identified six key areas for follow through by stakeholders including SME associations and business chambers, alongside public authorities.

ICC Bangladesh has very laudably joined hands in the follow through, co-hosting with UNESCAP sub-regional brainstorming seminar. ICCB's engagement in this initiative demonstrates awareness of our business leaders about their Corporate Social Responsibilities (CSR). For some years now, BB has been actively guiding mainstreaming of CSR in our financial sector. We are regularly publishing CSR reports to project contributions of different banks in promoting socially responsible businesses in addition to addressing various types of market failure. Indeed, banks have responded quite positively and spontaneously in these desired directions. This inclusive growth focus has indeed helped us well in coping with ongoing global financial crisis.

The UNESCAP study has highlighted six broad areas of follow through in helping SMEs gain export markets by integration in global value chains. The study's emphasis on improving the environment for integration is indeed well taken. We at BB are already active in two of the six key areas; viz., in widening access of SMEs to financing, and in supporting SME business infrastructure.

SME financing is a major thrust area of BB's ongoing financial inclusion campaign participated enthusiastically by all banks, on their own as well as in innovative partnerships with Micro Finance Institutions (MFIs) and mobile phone/smart card based IT platforms for cost effective service delivery. Besides our government, external development partners like ADB and JAICA have come

*ICCB-UNESCAP sub-regional seminar on 'Enabling Environment for Integration of SMEs in Global Value Chains' organized by ICCB-UNESCAP, 3 July 2012.


forward in aiding the SME financing initiatives with refinance support lines for lending banks. BB has been providing necessary regulatory support in developing this SME friendly refinancing platform where women entrepreneurs are getting preferential access.

SMEs are also benefitting from fast and secure payments and transfers now enabled by a modernized fully automated system for online clearing and settlement of paper based and electronic interbank payments and transfers. Mobile phone banking and e-commerce, and upgraded credit information bureau with online access are other recent BB initiatives further facilitating financial transactions and business promotion of SMEs.

In these and the other key areas for follow through the concerned public authorities, banks, business chambers and civil society support groups need to engage effectively with the SMEs in understanding their needs and prospects. In our financial inclusion drive we have seen that this is easier with targeting SMEs clustered in specific areas of concentration than with SMEs in widely dispersed locations. A number of SME clusters have already been developed in various parts of the country, particularly focused on home based textiles, light engineering, renewable energy and agro processing SMEs. Formation of SME business associations for collective voicing of needs, mutual cooperation networking, and linking with other value chain partners become easier with such clustering; extending of training/technical assistance, marketing support etc. likewise becomes easier.

Apart from prospects of export of goods, there may be significant scope for developing online export of IT enabled services by SMEs. Tech savvy younger Bangladeshi population already active in this area may usefully be supported in organizing as more formal SMEs exporting broader range of online services in larger volumes. Non- Resident Bangladeshi (NRB) entrepreneurs can join hands with our local SME entrepreneurs in promoting this particular e-commerce as they know both the worlds so well. Banks can play facilitating role as well, in developing this joint online marketing platform. Prospects of similar export of accounting and legal services by SMEs may also be significant, as seen from Indian experience.


Agricultural & Rural Credit Policy and Programme*

Agriculture is one of the prime sectors of Bangladesh economy. Issues about food security, employment creation and poverty alleviation are closely related with the development of agriculture. The government has set a target of 8% GDP growth within 2015. Besides, there is another issue on achievement of self-sufficiency in food production within 2013. We have seen in recent years that international market is no longer a reliable source of food at times of crisis and therefore the need to produce sufficient food production is crucial. Apart from the good weather, it is essential to supply other agricultural inputs like seeds, fertilizer, irrigation, pesticide, etc in time. Timely and easy access to credit enables farmers (including marginal farmers) to purchase the required inputs and machinery for carrying out farm operations and increasing production.

In line with the pro-poor agriculture and farmer-friendly policy of the government, the Agricultural and Rural Credit policy and Programme for the FY 2012-2013 has been formulated. A target of about TK. 14130.00 crore for disbursement of agri. and rural credit by different Nationalized, Specialized, Private and Foreign Commercial banks is set for the FY 2012-13. The target for Nationalized and Specialized Commercial Banks remain unchanged as 2011-2012. And for Private and Foreign Commercial Banks, the target amount is determined as 2% (instead of 2.5% under special consideration as previous FY) of their net Loans and Advances as on 31st March 2011. Apart from the target determined for the banks, BRDB will disburse an amount of TK 670.50 crore of agriculture and rural credit with their own finance.

Target and Achievement of Previous FY 2011-2012:

In the FY 2011-2012, a total of TK 13132.15 crore of agricultural and rural credit has been disbursed by 4 of nationalized, 3 of specialized, 29 of private and 9 of foreign banks which is 95.16% against their target. This disbursed

*Announcement of 'Agricultural & Rural Credit Policy and Programme (FY 2012-2013)', 24 July, 2012.


amount is Tk. 1700.22 crore (14.87%) more than the previous fiscal year's disbursement. Moreover, BRAC, under BB's special refinance programme for sharecropper, has disbursed an amount of TK 246.18 crore towards sharecroppers and BRDB also disbursed an amount of TK 567.48 crore of agri and rural credit in the FY 2011-2012.

Sector-wise disbursement scenario as stated below:

Implementation of Some Important Initiatives in 2011-2012:

J Under annual agri. and rural credit policy and programme, 501402 sharecroppers got appox. TK. 1086.0 crore of agricultural credit, which is 8.27% of total disbursed amount.

J An amount of TK. 8064.62 crore of agri. credit has been disbursed towards 2,106,797 small and marginal farmers, which is 61.41% of total disbursed amount.

J Around 3.20 lac women farmers got TK 735.14 crore of agri. and rural credit from banks, which is 5.60% of total disbursed amount.

J Taka 223.41 crore of agri. credit has been provided towards 7683 successful farmers.

J Taka 81.63 crore agri. credit has been disbursed towards certain import-alternative crops like pulse, oilseed, spices and maize at 4% concessional rate.

J More than TK 27.38 crore was disbursed only at 5% interest rate among 13100 tribal farmers in the 3 Hill Tracts Districts through BKB.

J Transaction of about TK. 223.54, 114.52, 38.80 and 22.25 crore has been occurred as credit disbursement, savings, inward and outward remittance respectively through more than 95.86 lac farmers' account (10/- taka account).

J Taka 0.84, 13.32 and 1.05 crore has been disbursed to solar energy driven irrigation pumps, integrated cow rearing & bio-gas plant and solar home system respectively.

Others

Poverty Alleviation

Livestock

Crop

Disbursement Amount in crore taka

3298.9274.8

1608.69329.61

1243.931025.865350.36

25.122.09

12.252.519.477.81

40.74

% of disbursement


J Under the special refinance scheme of Tk. 500 crore, an amount of TK 512.11 crore agri. credit has been provided through BRAC towards 4.32 sharecroppers (in 181 upazillas of 39 districts) which are out of any institutional credit.

Key Features of Agricultural & Rural Credit Policy and Programme for the FY 2012-2013

J Without changing basic features of agriculture & rural policy and programme of previous FY, some new features have been included in this policy. Some notable features of this kind are- addition of the scope of agri. and rural credit (crab fattening, koral and Mullet culture in coastal areas, fish culture in cage, etc.), extension of banking activities in rural areas, financial inclusion of farmers, encouragement in production of import-alternative crops, importance in fisheries and livestock, support to the implementation of new variety and technology etc.

J All private and foreign banks should have to determine their own target (2.5% of their net loans and advances as on 31st March) and achieve it.

J According to the Agricultural and Rural credit policy and programme, priority has to be given in 3 core sectors viz. crop, fisheries and animal resources over other sectors.

J In order to encourage normal banking transaction (like credit disbursement, savings, remittance, etc.) through farmers' account (taka 10/- account) in different banks as a part of financial inclusion, the deduction of levy up to taka one lac of debit/credit balance of these accounts has been withheld. Banks must have to disburse agri. credit though these accounts with a few exceptions. Besides this, banks may offer a little more interest than normal upon the deposit of the accounts. BB will continue to monitor on the utilization of these accounts quarterly basis.

J Comparatively less developed and neglected areas (like char, haor etc.) shall be given priority for disbursing agricultural credit. Credit shall be disbursed following the area approach method considering the comparative advantages of producing crops in different regions.

J Banks should participate in disbursing credit (against the interest loss subsidy provided by government) in the production of pulse, oilseed, spices and maize and at the same time in order to create opportunities for participation of private and foreign banks in this area, the farmer level interest rate has been increased to 4% from last FY (2011-2012). This credit facility shall be allowed at a concessional rate (4%) to reduce the dependency on huge import. The payment process of interest subsidy has been simplified with a view to settle the bank's claim promptly.

J In order to support credit disbursement towards solar home system in rural and urban areas, solar energy driven irrigation pumps, installation of bio-gas plant in integrated cow rearing farm and also in poultry firm (for production of bio-gas and of electricity from bio-gas), BB has formed a


refinance scheme from 2009-2010. BB will continue, also in the current fiscal year, this refinance facility against the finance of Banks/FIs towards the aforesaid sectors.

J Credit (against the interest loss subsidy provided by government) shall be made available on easy terms to the salt cultivators at a concessional rate (4%) in the coastal belts of the country.

J Agricultural and rural credit could be disbursed by banks through MFI partnership along with their own network as the previous FY. BB will monitor closely the MFI activities in this regard.

J Achievement of agricultural and rural credit target of the bank will be considered as the success of the management of the concerned bank which will be considered as a positive parameter for approval of opening of new branches, authorized dealer branches, exchange houses and to determine CAMELS Rating. In case of failure to achieve its agricultural and rural credit target, punitive measures (to deposit the undisbursed amount in BB at bank rate) will be taken.

Achievement of the target of this Agricultural and Rural policy and programme, credit disbursement towards special sectors, credit recovery and over-all ensuring satisfaction of borrower will be performed with the help of all participating banks and the monitoring of Bangladesh Bank. This policy support is expected to help directly in keeping the price level of foodstuff within the purchasing power of the mass people through increasing agricultural production and reducing dependency on import and alleviating rural poverty through increased flow of funds in rural areas.


AFI's Transition to Independence*

I am indeed very happy to be here at the inaugural of the 2012 AFI Global Policy Forum in Cape Town organized by the Alliance for Financial Inclusion (AFI) and National Treasury, Republic of South Africa. This year's GPF bears significant importance for the AFI members as decision on AFI's future in terms of its independence will be decided. It is quite heartening to see that since its inception in 2008, AFI has emerged as a strong platform for policymakers in developing and emerging countries to raise their voices strongly for promotion of financial inclusion, an effective tool for combating poverty and accelerating inclusive growth. Growing member networks of AFI, presently representing 91 member institutions from 80 countries clearly shows significant strides that AFI has made within its brief span of operation. AFI's effort in amplifying collective voice of developing countries in the G20 process is also quite noteworthy.

Financial inclusion policies of many member countries improved with the funding and knowledge support from AFI. Bangladesh Bank, the central bank of Bangladesh, became the member of AFI in 2009 and since then has been actively contributing to formulation and implementation of financial inclusion policies and programs. AFI has already documented Bangladesh Bank's financial inclusion programs for farmers (sharecropper scheme and no-frills accounts for farmers).

Would AFI be better off as a standalone entity or as a partner/associate in some broader coalition?

Not all financial inclusion initiatives are immediate business cases for financing institutions, not all of them would therefore view the initiatives as their immediate priorities; unless sensitized and motivated about their CSR obligations in terms of accepted norms of socially responsible business ethos. In exploring options for AFI as independent entity, it is therefore a point to ponder whether AFI will work well enough as a stand-alone entity pursuing the financial inclusion as a sole explicit objective; or whether it may work more

*On AFI's transition to independence, Cape Town, South Africa, 26 September 2012.


effectively as partner in a suitable alliance with some already existing global entity active in promoting socially responsible business. Prima facie, it appears that partnership in such an alliance may better serve the cause of promoting of financial inclusion; eliciting deeper, more abiding commitment from broader membership of financing institutions, governments, central banks, supporting international agencies, local and international philanthropies.


Financial Inclusion*

Financial inclusion promotes inclusive growth, productive capacity, youth employment and combats poverty by unblocking advancement opportunities for the disadvantaged poor. Lack of access to basic financial services leads to significant extent of social exclusion in education, employment opportunities, and social safety net. Long term stability depends highly on quality of economic and social growth which targets all population of the society in the development journey. The recent global economic and crisis points to a crucial need for reorientation of corporate goals and objects towards socially inclusive business practices.Central banks can play catalytic role in this reorientation of goals and objectives of financial institutions and markets towards socially responsible inclusive lending practices ensuring adequate credit flows to under-served or financially excluded economic sectors and population segments.

At Bangladesh Bank , the central bank of a low income developing economy, we have taken this approach. Results thus far are quite heartening; our financial sector maintained solvency and liquidity during the global financial crisis and in its aftermath, supporting the real economy in coping with adversities from the global slowdown instead of needing any bailout for itself. Deepening and widening financial inclusion has helped Bangladesh economy uphold domestic output and demand amid global economic slowdown, maintaining stable real GDP growth averaging over six percent per annum. Rising real wages, particularly strongly for the rural workforce, evidence rise in employment.

High Level Collaboration among Institutions

Broad thrusts for promotion of financial inclusion are unlikely to be very different across national borders, but differences in socio cultural backgrounds may necessarily mean differences in details of specific approaches. High level collaboration among member institutions of AFI in terms of sharing and developing innovative financial inclusion models will certainly provide valuable insights for all member countries particularly for those new in this area in

*Leader's Roundtable on Financial Inclusion, 2012 AFI Global Policy Forum, organized by Alliance for Financial Inclusion (AFI) and National Treasury, South Africa, 27 September 2012.


replicating and formulating further country-specific policies. Global dialogs on the issues of financial inclusion should have adequate representation of developing countries where most of the world's financially and socially excluded population live. Experiences of developed countries about how they are employing and promoting modern technology based financial services in including greater mass of population into the financial inclusion programs will be really interesting. Besides, cross-country views on how formal financial and non financial businesses can be drawn into business models that explicitly include the low income poor as their new customer bases in socially and environmentally responsible business pursuits will be very useful.

There are instances of successful business models around the world which embrace low income poor as their new customer bases in socially and environmentally responsible manner. In Bangladesh, BRAC is a major success example in engaging formal bank, MFI, and non-financial businesses in viable horizontally and vertically integrated linkages with micro and small enterprises. Grameen Bank has also developed some similar linkages between its micro/small enterprise clients and larger non-financial businesses. Many other MFIs have forged linkages with banks; they now need to focus on extending these linkages to socially and environmentally responsible non-financial businesses; in sustained viable relationships. Such innovative partnership models developed in other AFI members can help others in emulating similar kind of initiatives appropriate to their own countries.

Status of Financial Inclusion Programs in Bangladesh

Agricultural Credit Policy and Program: BB announces agricultural credit policy each year where each bank declares their agricultural credit disbursement target for the next fiscal year. The target for FY 2011-12 was set Taka 138.0 billion (approx. USD 1.75 billion) and actual disbursement was Taka 131.0 billion (approx. USD 1.65 billion). Target for FY 2012-13 has been set at Taka 143.1 billion (approx. USD 1.74 billion). In FY 2011-12, more than 3.0 million farmers received agricultural credit.

Credit Facilities for Sharecroppers: In 2009, BB launched Taka 5.0 billion (approx. USD 71.6 million) refinance line for landless sharecroppers in partnership with BRAC, a non-bank MFI. Till June 2012, BB has provided BRAC with refinance facility of Taka 4.9 billion (approx. 71.2 million) with which BRAC has provided loans to 415,000 sharecroppers in 250 upazilas of 48 districts.

10 Taka Account for Farmers: Since launching of the campaign in 2010, new bank accounts opened for landless/small farmers, poor wage laborers and other people of small means have reached 13.0 million. These new accounts are increasingly being used for deposit, payment and other transaction, besides receiving government subsidies for agricultural input and social safety net payments.

SME Credit Policy and Program: For the first time in 2010, banks and financial institutions in Bangladesh set target of Taka 385.0 billion (approx. USD 5.56 billion) for SME finance. Disbursement figure was even more encouraging: 138 percent of the target under which around 0.4 million SMEs were financed. In continuation of this, SME credit disbursement target of banks and financial


institutions were set at Taka 569.0 billion (approx. USD 7.99 billion) and Taka 590.0 billion (approx. USD 9.98 billion) in 2011 and 2012 respectively. A refinance scheme with funds from Bangladesh Bank, IDA, ADB and JICA is available at the central bank for banks and financial institutions at reduced interest rate of which 15 percent of the total fund is reserved for women entrepreneurs. Till June 2012, more than 5,000 women entrepreneurs have been allocated Taka 3.8 billion (approx. USD 46.4 million) from this fund. Number of women entrepreneurs receiving SME credit from banks and financial institutions increased to 16,697 in 2011 from 13,831 in 2010.

Mobile Banking: With fast expanding mobile telephony and great enthusiasm of the banks in offering financial services through mobile phones, Bangladesh Bank issued guidelines on mobile financial services in 2011. 23 banks have been given license thus far to provide mobile financial services (MFS) of which 14 banks have already started their operations. These banks are presently providing MFS to around 1.0 million customers; average transaction volume is around Taka 330 million per day. Services include P2P, B2P, P2B, G2P and inward remittances.

Financial inclusion initiatives have gained momentum worldwide amid ongoing global economic slowdown in lingering shadows of the global financial crisis, particularly as financing for small businesses has dried up even in the advanced economies, exacerbating the slowdown. To respond, the post crisis new global G-20 forum has taken up financial inclusion in its action agenda, entrusting global Standard Setting Bodies (SSBs) under the GPFI umbrella with drawing up of standards and guidance for financial inclusion upholding financial stability.

Well before the advent of global financial crisis we at Bangladesh Bank have been pursuing financial inclusion to hasten inclusive growth and poverty eradication. Conscious targeting of bank credit flows to agriculture and SMEs have been supplemented by substantial volumes of self employment credit from Micro Finance Institutions (MFIs) spread countrywide. This early attention to financial inclusion has helped shield Bangladesh economy from liquidity crunch or any sharp growth slowdown during and after the global financial crisis. While growth momentum in export related output activities slowed down somewhat, agricultural and manufacturing output activities catering to robust domestic demand held up well, supported by credit flows at usual growth pace from banks and MFIs. This didn't leave us in complacent inaction, however. Following the global financial crisis BB launched a countrywide financial inclusion campaign motivating and guiding banks in reaching out cost effectively to the underserved/unserved rural and urban poor; partly by branch expansion and partly by forging partnerships with licensed and regulated MFIs, pressing into use IT based modes of remote delivery of financial services using mobile phones and smart cards. Against their SME and agricultural financing, banks are getting refinance support from BB to meet occasional liquidity needs; the refinance lines are funded by development partners, government of Bangladesh (GOB), and BB. Over the past two years, banks in Bangladesh have opened nearly 13 million no-frills accounts with nominal initial deposits as low as 10 Taka (about 12 Cents) in names of hitherto unbanked small


landholder/tenant farmers, floating urban laborers, and poor social safety net benefit recipients.

While launching the financial inclusion campaign, we at BB were aware that not all financial inclusion initiatives would be immediate business cases for banks, some of them could view other quicker payoff business lines as higher priorities. BB therefore opted to motivate and guide banks to weigh in social benefits of the inclusion initiatives alongside financial gains prospects, referring to evolving global norms of Corporate Social Responsibilities (CSRs). A campaign for mainstreaming of CSRs with resolute commitment at the highest corporate level (boards of directors) is ongoing in our financial sector alongside the financial inclusion campaign. As result, we have found banks warmly embracing the financial inclusion initiatives, spontaneously innovating and introducing diverse new financial service delivery packages for the targeted new clientele groups. Sensitization of banks to CSRs has helped keeping them focused on financing productive pursuits rather than unproductive speculative investments that tend to end up as toxic assets of the kind that precipitated the global financial crisis. Besides the rather unorthodox promotional role, BB's supervisory oversight on the financial inclusion initiatives focus mainly on keeping tab on management of risk exposures in the new areas, and on protection of consumer interests of the new clientele bases.

The inclusive growth focused directional bias in Bangladesh monetary and credit policies towards supporting productive investments and away from unproductive speculative ones helped her economy to maintain firm foothold on stable progress path. Real GDP has been growing at steady six percent plus annual rate even in the ongoing global slowdown, and poverty decline has been gaining pace with sharp uptrend in real wages for rural labor force.

Two strands from Bangladesh's approach to financial inclusion may be of relevance for ongoing broader regional and global initiatives. Firstly, commitment of banks and financial institutions to the financial inclusion initiatives would be stronger when grounded on mainstreaming of CSR in their institutional ethos and objectives. Secondly, as inclusion initiatives are grounded in socially responsible banking ethos, the initiative will help pull away financing resources from unproductive speculative outlays onto productive pursuits of underserved economic sectors and population segments. Together they will support and bolster financial stability by reducing the riskiness of asset portfolios of banks. For safeguarding financial stability while pursuing rapid gains in financial inclusion, it would be important to keep the lending practices needs based and relationship based; unlike the mass scale impersonal mechanistic credit score based consumer financing seen in the advanced economies in the run up to global crisis when mislabeled, mis-sold risky bundled of such loans turned toxic, triggering chains of default and distress.


Mutually-Supportive Relationship between Financial Inclusion and Financial Stability*

August 9, 2007 is a day that will forever be remembered as the beginning of the great global financial and economic crisis of the new millennium. On that day, BNP Paribas SA, at the time France's largest bank, stopped redemptions from three investment funds it managed because it could no longer value the holdings of mortgage-related securities that constituted about a third of the funds' total investments. Although it wasn't the first such action by a major fund manager, the announcement by BNP Paribas was laced with unusual candor about the condition of the securitized mortgage market in the United States.

That day started just as any ordinary day in the global economy. But now, nearly six years into a seemingly endless period of financial and economic instability, as the world appears to lurch from one crisis situation to another, we are realizing its full impact. Millions of jobs lost, trillions of dollars worth of asset values wiped out, dreams of financial security shattered for countless families - the global financial and economic crisis has truly been a setback in the march of the world community toward a better life for all.

But not for all have the recent years spelled doom and disaster. All the time, while big banks have reached for lifelines to their governments and corporate clients, big and small, have faced obstacles in raising funds, a quiet revolution has continued apace in many countries. That revolution, the revolution of financial inclusion, has persevered, in the midst of financial turmoil in bringing formal financial services to thousands upon thousands of households and small entrepreneurs who previously never had a relationship with a financial institution. And a great many of the "newly-banked" are women, low-income families, rural dwellers, and members of marginalized groups such as religious and ethnic minorities. Doors are opening to a more secure future for the beneficiaries of financial inclusion, most of whom live in the developing world, even as they unfortunately seemed to be closing for millions of families scarred by the financial meltdown in the more advanced economies. Bangladesh, however, has become a role model for financial inclusion

*First published in 'The Financial Express' titled "Financial Inclusion and Financial Stability Complement to Each Other" on Sunday, 21 April 2013.


particularly for the courageous regulatory moves by its central bank, Bangladesh Bank, for guiding the banks, both private and public, in embracing financial innovative inclusive products even during this challenging time of global financial crisis. 10 taka (12 Cents!) bank accounts for millions of farmers and social safety net beneficiaries, bank-led mobile banking, school banking, small medium enterprise loans including for women entrepreneurs and green banking are only a few of these inclusive financial products.

A question is often asked of financial sector policymakers: why emphasize financial inclusion at a time of global turmoil? Why not concentrate all the attention on dealing with sick banks and insulating the healthy portion of the system from systemic shocks? Can banks and other financial institutions be profitable and build capital while reaching out to these new and inexperienced customers? Isn't financial inclusion a diversion, a luxury, that can be pursued only when times are good? Even one commentator wanted me to make a 'soul search' and refrain from this non-conventional journey of financial inclusion. I, of course, stuck to my guns. Yet, we need to respond to these reservations.

An answer to this question can be given by exploring the linkages between financial inclusion and financial stability. If financial inclusion can be shown to contribute positively to financial stability, then regulatory authorities can pursue both objectives even with scarce supervisory resources. Research on these linkages is only just getting started, but already several important relationships have been identified.

Defining Financial Inclusion

The G20 association of major world economic powers added its imprimatur to financial inclusion by recognizing it as one of four pillars in the financial sector reform structure of its Global Development Agenda, and given equal standing along with financial integrity, financial consumer protection, and financial stability. In so doing, the G20 defined financial inclusion as:

"…a state in which all working age adults have effective access to credit, savings, payments, and insurance from formal service providers…"

The "newly banked", as the beneficiaries of financial inclusion are often called, have not necessarily been deprived of all financial services. They may have significant, and often negative, experience with informal money lenders, unofficial exchange houses, and ancient transfer systems such as hundi and hawala. However, financial inclusion offers them the possibility of dealing with rules-based institutions that are regulated, more transparent in their pricing, less likely to cheat their customers, and often even cheaper to use than the informal service providers.

Direct Impact of Financial Inclusion on Financial Stability

To understand how financial inclusion can promote financial stability, it is convenient to discuss both direct and indirect impacts. Research on these links is just beginning, but analysts have pointed to the following direct links:


J Financial Inclusion Promotes a More Diversified Funding Base. Periods of financial instability are more often related to crises of liquidity than crises of solvency. In turn, liquidity crises arise when financial institutions are unable to retain funds or attract additional funds to meet their payment obligations. Recent liquidity crises have originated in wholesale markets - banks unable to obtain funds from other banks, unable to roll over existing bond market obligations, or unable to keep foreign depositors from repatriating their funds. Apart from some well-publicized cases, usually traced to policy incompetence (such as Northern Rock and the current situation in Cyprus), runs on retail deposits have fortunately been relatively rare.

Accordingly, in any banking sector, the higher the proportion of funds the sector obtains from retail depositors, the more stable it tends to be. And within the broad category of retail deposits, it is plausible that small deposits are more stable than large deposits. This assertion is certainly true when comparing the reaction of holders of small accounts to holders of large accounts at a given bank when the remuneration offered to the depositors on these accounts lags behind competitors' offerings. Small depositors tend to stay put; large depositors tend to shop around. It is also likely, though not demonstrated through research, that small depositors are less likely to create a run on a bank than large depositors.They are less likely to be exposed to negative media coverage about a bank, and perhaps less likely even to hear rumors about a particular institution. Although small depositors do participate in bank runs once they get going, they very rarely start them.

With financial inclusion, a bank can diversify not only its deposit base, with numerous small accounts comprising a greater proportion of total deposits, but it can even expand the total deposit base to comprise a greater proportion of total attracted funds.

J Financial Inclusion Promotes a More Diversified Loan Base. It is just as important for a bank to be diversified on the asset side of its balance sheet as it is on the liability side. If solid underwriting is maintained, it is logical that a loan portfolio consisting of thousands of small loans to households and microentrepreneurs will suffer fewer aggregate loan losses over a given period of time than a portfolio consisting of a few loans to large corporate borrowers. Indeed, before banks began to lower their underwriting standards in the United States in the early 2000s, loans to the household sector did have lower rates of default, and lower losses given default, than loans to the corporate sector.

From a risk management standpoint, it is also true that loan losses on a portfolio of many relatively homogeneous loans are easier to model, if data are available over a long period of time, than losses on a "lumpy" portfolio of a few large corporate loans. And better modeling and prediction of loan losses can lead to better loan pricing, more accurate provisioning, and consequently more stable profits.


J Financial inclusion Diminishes the Appeal of Potentially Unstable Savings Channels. Admittedly, the formal financial sector has not consistently and uniformly been a safe haven over the last decade. However, in countries with a low penetration of formal financial services, alternative savings channels have sometimes caused disaster for many families. In Albania in the 1990s, for example, in spite of a fairly robust switch from a centrally-planned to a market economy, the formal financial sector was very limited. Households had few reliable savings options. Quickly, financial crooks took advantage of the situation. Fully two-thirds of households faced financial ruin when they invested in one or more "pyramid schemes." When the schemes collapsed, the resulting riots and instability led to the deaths of some 2,000 people, rampant inflation, a 7 percent decline in output in one year, and currency depreciation.

Kenya has also had a long, unfortunate history with pyramid schemes. A recent report listed 271 different schemes that were active in the 2006-2007 period, targeting all segments of society, but having particular appeal to those without a connection to a formal financial institution. Fortunately, the amounts lost were nowhere near as great as in Albania, but they undoubtedly caused financial distress to a large number of households.1 Bangladesh too has experienced a few tragedies of pyramid schemes mainly due to lack of financial literacy and enhanced greed. Financial inclusion if started earlier could have a void such tragedies to some extent.

J A More inclusive Financial Sector has Greater Political Legitimacy. Bankers have never really been loved anywhere, and in the aftermath of the financial crisis there has been even more public anger directed at bankers who, fairly or unfairly, have been judged to be at fault, and, in many cases seem to be escaping punishment and are even seeming to be rewarded by their firms. The main reason for this public anger is that in the minds of the public, banks are run by rich people for the benefit of other rich people.

In the advanced industrialized economies that have been hit hardest by the financial crisis, there are calls for restrictions on bankers' salaries, and calls for the largest financial institutions to be broken up. In some countries, such as Jordan, a negative public attitude has led to higher corporate profits taxes being imposed on banks, compared with other corporations. In other countries, such as Venezuela, banks have even been nationalized. In Greece, banks have been vandalized and their customers harassed. In these and other countries, there is the sense that private banks are somehow illegitimate, creating profits out of thin air. Although some proposals, such as capping salaries or requiring

1It should be noted that pyramid schemes do not target only the unbanked. As recently as 2011 and 2012, hundreds of thousands of investors in the United States were bilked by a scheme that ultimately resulted in losses of $600 million. Most of these people also utilized formal financial services but were enticed by the high returns promised.


divestiture of risky activities may have legitimate public policy purposes, interventions in banks' affairs that reduce their profitability, force them to invest in assets not of their choosing, or expropriate shareholders surely do not contribute to financial stability.

Financial inclusion, by encouraging a customer base that is more representative of the general population, especially low-income, rural, and minority segments, can go a long way towards legitimizing the financial services industry in the minds of the public and politicians. Banks will be viewed as helping people, not hurting them. And when banks become less and less of a political issue, the risk of destabilizing statements made by prominent individuals, and worse, destabilizing public policies, is reduced.

Indirect Impact of Financial Inclusion on Financial Stability

In addition to the direct impact of financial inclusion on financial stability, there are several potential indirect effects. (It should be noted that these indirect effects are desirable in themselves, regardless of whether or not there is a strong linkage between these effects and financial stability.)

J Financial Inclusion Promotes Financial Stability at the Household Level. There is considerable evidence to support the idea that providing formal financial services to the previously unbanked encourages savings. If households have a safe place to save, they will save a higher percentage of their disposable income. These savings can be used to smooth out consumption during periods of lower incomes, or to finance necessary, unexpected consumption (such as medical expenses), reducing the chances that a household will be driven into debt. And lower levels of household debt are positively correlated with overall financial stability.

J Financial Inclusion Promotes Greater Income Equality, Thereby Fostering Financial Stability. Recent economic research has shown that greater income equality is associated with longer spells of economic growth, interrupted by shorter slowdowns. The precise mechanisms are unclear, but the hypothesis is that concentrations of income and wealth foster the buildup of imbalances, such as asset price bubbles and rapid credit growth, that are associated with subsequent downturns. In turn, longer periods of economic growth foster financial stability, not only by reducing debt-to-income ratios, but also by allowing banks and other financial institutions to build capital. To complete the indirect effect, financial inclusion has been shown to contribute significantly to income equality and poverty reduction.

Increases in income equality, which can be promoted by financial inclusion, are also associated with greater social stability, which can also help promote financial stability. When all segments of society believe that they can more fully participate in, and benefit from, the production and distribution of goods and services, there is a lower likelihood of disruptive social activism, and a stronger resistance to the falsely hopeful messages of demagogues whose primary targets are often banks and other financial institutions.


Feedback Effects: Financial Stability Leading to Financial Inclusion

Although the available literature and analysis have stressed the contribution made by financial inclusion to financial stability, there can also be a useful "feedback effect" from financial stability to financial inclusion. This "virtuous circle" comes about because a more stable formal financial sector will be a more attractive option for the unbanked. It is more attractive not only for the obvious reason that people want to place their wealth in stable institutions, but also because a stable financial sector - one in which financial institutions aren't constantly trying to make up for declining profitability from loan losses and other asset devaluations - can afford to reduce fees for everyday transactions and accounts, bringing financial services into the realm of affordability for many people.

Conclusion and A Small Word of Caution

Certainly, there are many reasons to believe that financial inclusion can support financial stability. In order to play this supporting role, however, it has to be the right kind of financial inclusion. By its very nature, financial inclusion is bringing in people who have no track record in the use of formal financial services. They have no formal credit history, may be unfamiliar with filling out forms, and may lack proper identification. Accordingly, products must be tailored carefully to their needs, at a reasonable cost, and they cannot be "overloaded" with financial services that they do not need or want. In some cases, financial literacy education may be required, so that the tools they are provided can be used properly.

But if these conditions are met, financial inclusion can open up worlds of opportunity for those who were previously excluded, expanding the customer base for a whole range of financial products, and in so doing contribute mightily to a vibrant -- and stable - financial sector.

Bangladesh Bank embarked on financial inclusion from a strategic vantage point to align itself with the national planned strategy of inclusive growth as reflected in both sixth five year plan and also the perspective plan. In the process it has been able to reach millions of unbanked population which has helped Bangladesh economy maintain a six plus growth rate for years. The more diversified deposit and loan bases created through strategic financial inclusion has led to a desirable financial stability in Bangladesh despite prolonged global financial crises. The end results of this strategic option of Bangladesh may not be visible immediately. But all indications are that the on-going financial inclusion drive of BB will certainly lay a solid foundation for an inclusive sustainable growth process for Bangladesh.


1. Population (15+) 95.6 (mil.) (i) Economically active population (15+) 56.7 (ii) Population not in labor force (15+) 38.9

2. Total No. of bank branch outlets (up to June 2013) 8,427

3. (i) Total No. of deposit accounts in banks (up to 61.2 (mil.) June 2013),Of which: (ii) No. of no-frills accounts of small holder/tenant farmers and other low income individuals opened with nominal 13.2 (mil.) Tk. 10 initial deposits (up to 22nd August 2013) 7.2 (mil.) (iii)No. of mobile phone banking accounts. (up to July 2013) (iv)No. of agent outlets serving mobile phone 108 (thousands) banking users ( up to July 2013) (v) No. of ATM outlets of banks (December 2012) 5,248

MFIs

1. No. of licensed NGO-MFIs (June 2012) 6182. No. of branches (June 2012) 17,9773. No. of clients (June 2012) 24.6 (mil.)

Post Office and Cooperatives

1. No. of Post Office branches 10,0002. No. of Post Offices with facility of Electronic Money Transfer (EMT) services 1,1503. Post Offices with postal cash cards services 314. No. of Cooperatives 183 (thousands)

Banks Coverage

Some facts and figures on the latest state financial inclusion in Bangladesh


It has been observed from the above data that total number of deposit accounts in banks (up to June 2013) stood at 61.2 million which is about 64 percent of the total population of age 15+ and 108 percent of the economically active population. Financial inclusion due to opening of no-frill accounts (13.2 mil.)constitutes almost 25 percent of the total economically active population.

There are around 8.4 thousands bank branches along with about 18 thousands branches of NGO-MFIs, 1.2 thousands post offices and 183 thousands cooperative outlets totaling about 210.6 thousands branches/outlets for 56.6 million economically active population generating at least one financial service point per 270 people. As of July 2013, there are around 7.2 million mobile banking accounts which are growing at around 10 percent per month during the last few months.


Accelerating Sustainable Development*

I am indeed happy to join this global meet on sustainable development and hear the Dhaka Declaration on this vital agenda. I am also pleased to see that participants from all around the world have gathered here in Dhaka and deliberated on a wide ranging issues covering macro-economic achievements of Bangladesh over the last four decades, poverty eradication, food security, nutrition, sustainable agriculture, sustainable energy and green technology, urbanization, health and population, climate change and disaster management, democratic governance and access to education and knowledge management.

As we heard the Dhaka Declaration, delegates have done a good job and reached consensus on global priorities in accelerating attainment of MDGs and simultaneously charting the post-2015 sustainable Development agenda. As has been reflected in this global meet Bangladesh's government and civil society have been extensively engaging in participative consultations over the past few years and contributing significantly towards charting priorities and progress paths of rapid poverty eradication with broad based inclusive sustainable social, environmental and economic progress, by 2015 and beyond. Outputs from these deeper consultations helped prepare government's Five-year plan and perspective plan spanning MDG years up to 2015 and beyond. I am sure you have noted from the presentations made in this meet that Bangladesh is on track for attaining or exceeding poverty reduction and most other national level MDG goals, with steady trend of inclusive economic growth supported interalia by a continuing pronounced pro-poor stance in social sector public expenditure as reflected in its budget allocations including the latest one, as also by social responsibility driven financial inclusion and green banking campaign orchestrated by Bangladesh Bank, the country's central bank in its somewhat unorthodox developmental role.

In these developmental role initiatives BB is upholding financing flows to output and employment generating SMEs, and to green initiatives like renewable (solar/biogas's based) energy generation, effluent treatment, adoption of energy

*Global Meet on Sustainable Development 15 June 2013, Nabab Nawab Ali Chowdhury Senate Bhaban, University of Dhaka.


efficient, emission minimizing inhouse practices and processes in banks and financial institutions themselves, Bangladesh Bank has established a new department on Green Banking and Corporate Social Responsibility to take this socially and environmentally financing forward in line with global expectations. Both Rio+20 and COP-18 conferences, where today's chief guest played a Key Role, expressed appreciation for BB's green banking and socially responsible financing initiatives. Thanks to today's chief guest. I happened to be one of the few central bank governors attending those conferences.

I am sure you may have covered most of the grounds that I would like to touch briefly now. Between now and 2015, Bangladesh government and other stakeholders will need to focus on slower progress areas of MDGs attainment if any; particularly on universal health care/coverage and non-communicable deseases in the unfinished agenda. For years to come beyond 2015 we need to remain on course on the broad social consensus for fastest feasible total eradication of poverty and deprivation being the over arching priority for Bangladesh's post 2015 sustainable development agenda; in a peaceful harmonious local and global environment. There is no denying the fact that we have made huge progress in poverty reduction over past 20 years, almost halving during this period. At the same time we still have around thirty million people living in extreme poverty which is also a large number and hence we need to think of innovative ways of lifting them out of this human curse called poverty. These are the people we see living on footpaths when we travel to work. So let's not make this just a technical exercise, let's keep them in our minds as a mental image of who we are doing this target setting for. And while thinking about them let's not forget that despite being highly challenging places cities will continue to attract rural population for their inherent urban dream. So, we need to focus on sustainable urbanization agenda of developing first, second or third tier 'Smart Cities' with adequate physical and social infrastructures as demonstrated by the Chinese authorities and help people, the biggest urban resource, network, integrate and intensify social transactions for their sustainable living and thriving in a dynamic socioeconomic context. Harnessing the creative energies of broad masses by opening up equitable access to education and training on knowledge and skills needed in the twenty first century global labor market will be a keystone in our development strategy.

I hope you have already discussed at length that Bangladesh has made eye-catching progress on food security as our declining food imports show. But at the household level we should worry that dietary diversity often gets neglected as the very poor mainly eat rice with very few extras. So we need to track dietary diversity as our health outcomes are more related to this than the quantity of food we eat. Certainly the UN MDGs provided a useful unifying campaign theme and framework for concerted thrust of global development cooperation in combating poverty, deprivation and environmental degradation. Similarly post 2015 sustainable development agenda consultations like the one we are having here are helping in achieving strong broad based civil society engagements with active participation of the relevant policy makers at all levels national, regional and international. I presume the sessions you have conducted here must have revisited lessons from regional and country experiences including MDG implementations pitfalls. I hope these lessons will contribute significantly in


avoiding some of the similar pitfalls while prioritizing and designing implementation strategy of post 2015 Sustainable Development Agenda.

At the very end, let me remind the audience that despite some spectacular successes in attaining MDGs in many countries including ours, reform initiatives related to MDG attainment in some areas have often tended to be bogged down by resistance from the beneficiaries of status quo. Both the national and international governance structures could not do much in breaking this evil nexus of vested interests. Given this one may hope that activating coalitions of likely beneficiaries of the planned reforms may perhaps be a possible countering strategy against vested interests in status quo. Success in fast tracking poverty eradication and accelerating sustainable development will hinge importantly on strong broad based civil society engagement at country level and on heightened international support and cooperation at regional and global levels.


Financial Inclusion Leads to Financial Stability*

Steadily growing but still a low income economy, Bangladesh has over years developed a social consensus for inclusive socioeconomic growth equitably opening up advancement opportunities for all population segments. To this end, annual national budgets consistently allocate substantial expenditure outlays in the social sector (around a third of total budget) for pro-poor human development (healthcare, education & training) and social safety net to unleash the creative energies of the entire population; besides expenditure for infrastructure and other areas promoting enabling environment for private sector driven rapid growth.

Bangladesh Bank (BB), the country's central bank, has been supporting the government's inclusive growth efforts by promoting inclusive financing of all productive initiatives including those of the traditionally underserved farm & nonfarm SMEs and other innovative niche area entrepreneurs. BB's inclusive financing promotion takes place within the overall monetary growth envelop of monetary programs designed to maintain price stability and macro-financial stability. Attention of the inclusive financing initiatives on adequacy of credit flows to SMEs helps enhance macro-financial stability, with incremental output on the supply side and employment and income generation on the demand side.

BB has got the entire Bangladesh financial sector engaged enthusiastically in inclusive financing initiatives on the one hand by invoking their corporate social responsibility, and on the other hand by steering facilitation and adoption of cost saving modes of off-branch delivery and management of numerous loans to SMEs in dispersed locations. Supervisory attention to end use, recovery rates and asset quality of loan portfolios in the new customer bases accompany the inclusive financing facilitation efforts. BB's caution-mixed inclusive financing promotion initiatives are serving Bangladesh economy well, as evidenced by stable, steady economic growth amid the global financial crisis and the lingering global growth slowdown. Unlike elsewhere including advanced economies, credit flows for output activities of SMEs in Bangladesh held steady and did not suffer

*21 June 2013, OMFIF- Golden Series Lecture in London on Recent socio-economic trends and prospects in Bangladesh: Stability supportive use of inclusive financing


exclusion crunch during or following the global financial crisis; upholding internal demand and output activities on steady long-run growth path.

Main thrusts of the BB initiatives for promotion of inclusive financing include:

i) Articulation of commitment to inclusive financing in BB's Monetary Policy Statements issued ex-ante on half yearly basis to anchor inflation expectations.

ii) Spearheading and guiding the mainstreaming of Social Responsibility in corporate ethos and objectives of financial institutions.

iii) Promoting and facilitating adoption of cost saving options of financial service delivery to numerous clienteles in dispersed off branch locations, including mobile phone/smart card based banking using Micro Finance Institutions (MFIs) and other locally active area agents. BB has steered major upgradation of the entire financial sector IT infrastructure, inter alia introducing online interbank clearing and settlement of transactions thru diverse platforms interconnected by a national payments switch, and online access to credit information on borrowers including SMEs.

iv) Liquidity support refinance to lenders against their loans to the inclusive financing target sectors including agriculture, SME and 'green' initiatives. The refinance lines are mainly funded by development partners, with small BB participation within the overall monetary growth envelop of monetary policy stance.

v) To bring down high borrowing costs for SMEs, a partial risk guarantee scheme for lenders to SMEs with development partner support is expected soon.

vi) Direct SME financing facilitation is being supplemented by 'factoring' or discounting of their receivables against credit sales to buyers of good credit standing, easing pressure on their finances.

vii) A BB supervised, government funded Equity and Entrepreneurship Fund (EEF) extends partial equity support to agro based and IT sector enterprises including SMEs. Private sector venture equity providers have also come up lately.

viii)To facilitate delivery of financial and other services, SMEs are being drawn into suitable local or regional clusters convenient for networking between themselves and with their backward and forward linkages.

BB's Inclusive financing promotion initiatives conducted within the monetary growth envelop of the current monetary stance aim at smoothing out impediments to necessary growth of SME and other target sector financing, and not at creating any credit surge.

The following brief overview of Bangladesh's macroeconomic stability with decade-long above six percent annual average real GDP growth would further reconfirm that BB's inclusive financing promotion approaches have served the economy and financial sector well during and following the global financial crisis; protecting credit flows for


productive activities and aiding stability both on the demand and supply sides amid global growth slowdown.

Healthy macroeconomic trends upholding BB- and Ba3 sovereign credit ratings with stable outlook, for four successive years now by S & P and Moody's respectively is well supported by robust improvement in all other key macroeconomic indicators. The estimated size of GDP in FY13 stood higher at about USD 128.8 billion from only USD 47.1 billion in FY2000, while GNI per-capita increased by about 245 percent to USD 923 in FY13 from only USD 377 in FY2000. At the end of June 2013, the amount of international reserves is expected to stand at around USD 15.0 billion, which would be more than 4 months imports equivalent. At the end of June 2013, government debt, budget deficit and investment as a percent of GDP are expected reach at 37.2, 4.8 and 26.8 percent respectively from 46.4, 6.1 and 23.0 percent respectively at the end of June 2000.

Robust Economic Growth with Stable Inflation

J Steady progress in overall domestic economic activities along with positive developments in three major subsectors of the real economy aided by various supportive policy initiatives helped in achieving 6.03 percent real GDP growth in FY13 keeping the economy on its long-run growth path despite episodes of internal (floods, cyclones etc.), and external (spiraling commodity prices, global financial crisis, etc.) shocks.

J BB's monetary policy succeeded in maintaining stable inflation (mostly in single digit, only rarely at or near double digit level), while prudent fiscal policy helped accumulating higher revenues with moderate deficits leading to declining public debt ratio.

Impressive Export Growth, Albeit Heavily Concentrated in Apparels

J Exports more than quadrupled over the past decade, still on growth trend amid global slowdown.

J Apparels comprising three fourth of total exports keeping steady market share in US and growing in EU.

J Non-apparels exports also on sustained growth path, in diverse sectors including horticulture and fishery, jute goods, ceramics, pharmaceuticals, leather goods, light engineering, ship building, IT services & so forth.

Rising Remittance Inflows from Migrant Workers

J Remittance inflows from migrant Bangladeshi Diaspora world over continue growing at double digit rates bolstering FE reserves and external sector viability.

J Government facilitating migration of workers to job markets abroad.

Substantial Poverty Decline Evidences Inclusiveness of Growth

J Population in poverty fell from 61.6 million in 2000 to 44.8 million in 2010.

J Consumption Gini-coefficient unchanged at 0.33 over ten years, evidencing social cohesion.


Significant Improvements in Social Indicators over Past Two Decades:

1991 2011 / Latest

Fertility rate (births per woman) 4.36 2.20

Infant mortality rate (per 1,000 live births) 93.5 36.7

Life expectancy at birth (years) 59.99 68.94

Malnutrition prevalence, height for age (% of children under 5) 76.70 43.20

Adult literacy rate (% of people aged 15 and above) 35.32 56.78

J "Made in Bangladesh" innovations (e.g. micro-credit, non-formal education, oral rehydration therapy, low-cost birth mat etc.) contributed to the improvements (The Economist, May 2013).

J Well-rooted Government-NGO development partnership with relatively light regulatory rigor also contributed.

Challenges on Medium and Longer Term Progress Path, Policy Direction Options

J Bangladesh is poised to cross the (lower) middle income country group GNI threshold in a couple of years. Time now therefore to chart the next phase of her progress path aiming at: (i) Reaching the upper middle income country group GNI threshold by 2030, and (ii) Attaining developed advanced economy status by 2050.

J Bangladesh has already two of the most important requisites, viz.,(i) The demographic dividend of a large youthful work force, and (ii) A broad based social consensus on social responsibility driven inclusive development strategy to harness the ingenuity and creative energy of all population segments in overcoming challenges on path of rapid poverty eradication and eventual prosperity.

Bangladesh'S Demographic Window of Opportunity, Also a Massive Challenge in Skill Development and Job Creation:

J While population growth is now 1.5 % per year, the working age population is growing at 2.5-2.8%.

J Growing working age population widens opportunity for rapid development but also presents skill development and employment creation challenges.

A few Other Overriding Priorities on the High-Growth Trajectory Towards Prosperity

J Enduring social cohesion and harmony, fostered by liberal democratic practices tolerant of plurality of views and perspectives;

J Good governance in all spheres of social life, cemented by clarity of roles and responsibilities, transparency and accountability;


J Education, training, skill development and innovation nurturing programs on massive scale for the young and the working age population, to meet the job market needs of a rapidly modernizing and advancing economy;

J Rapid modernization and integration of the country's financial sector with global financial markets, enabling it to attract and handle the typical massive investment flows in a fast advancing economy. Bangladesh Bank will itself need to modernize and evolve fast in steering this integration with global financial system in an orderly manner without jeopardizing stability.


SME Financing Challenges and Policy Solutions*

Bangladesh's inclusive growth strategy views SMEs as crucially important drivers of sustained broad based output, employment and income generation. Government and civil society organizations are active in supporting and promoting SME initiatives, working for removal of the financial and nonfinancial impediments to their commercial sustenance in the supply chains of the goods and services they produce.

Bangladesh Bank (BB), the country's central bank, is guiding facilitation and promotion of access to finance for SMEs, identifying the challenges and trying out policy solutions, where necessary in collaboration with the government, the private sector, and external development partners.

SME initiatives typically begin with small, often insufficient equity from entrepreneurs' own personal or family savings. Absence of track record in business and lack of real assets to offer as collateral make it difficult for SMEs to access debt finance on affordable terms. Banks and financial institutions primarily geared towards serving larger urban businesses are in general neither well motivated nor well equipped to serve SMEs in dispersed locations far off from branches. Besides higher risks in SME lending, they also find SME loan administration costlier. In these circumstances SMEs find it hard to get credit for inputs procurement and other expenses. SMEs often have also to sell their produces on credit, further burdening their precarious finances. BB has adopted a comprehensive approach in trying to address the multifarious SME financing impediments and disincentives, covering all areas from attitudinal orientation of the lending institutions onward, itemized below.

J For some years now, BB's Corporate Social Responsibility (CSR) mainstreaming initiative has been guiding institutionalization of socially and environmentally responsible financing in corporate ethos and objectives of lending institutions. This has successfully motivated and enthused the entire financial sector in financial inclusion initiatives of reaching out to all productive undertakings of all population segments

*SME financing challenges and policy solutions opening statement as panelist in AFI session Frankfurt, 28th June, 2013.


including the SMEs.

J Multi-pronged BB initiatives for bringing down lender's costs in financing of SMEs and other clientele in dispersed locations include:

(i) Promotion of smart card/mobile phone based off branch financial service delivery thru MFIs and other locally active area agents. To this end BB has steered major modernization of the financial sector IT infrastructure, introducing inter alia online interbank clearing and settlement of payments thru diverse platforms interconnected by a national payments switch, and online access to credit information on borrowers including SMEs.

ii) Low cost refinance for lenders from BB against their SME financing. This facility funded largely by development partners like IDA, ADB and JAICA has a women's entrepreneurship promotion element, as only lenders with at least fifteen percent of their SME loans to women entrepreneurs qualify for the refinance facility. Besides these externally supported refinance windows, another refinance line funded by BB itself supports lending to renewable energy and other environmentally benign projects including those of SMEs.

(iii) Preliminary work is in progress for setting up an official Registry of moveable assets, to facilitate use of these assets as collaterals for institutional borrowing by SMEs and others.

iv) To help bring down borrowing costs for SMEs, setting up of a partial risk guarantee scheme for SME loans with fund support from an external development partner is at final stage.

(v) BB is promoting a 'clustering' approach of lending institutions in their SME financing, seeking to draw large number of SMEs in the same or linked sectors into suitable regional clusters where they can be supported conveniently with various financial and non-financial services by lenders and other concerned government and civil society organizations. (Such clustering also facilitates useful networking between the SMEs themselves, as well as with their value chain backward and forward linkages).

(vi) BB is catalyzing partnerships between lending institutions and diverse public and private sector entities (such as BSCIC, DNet, EDCL, DCCI etc.) in integrated initiatives for training, grooming up and financing SME entrepreneurs in innovative undertakings like biomass based energy generation, IT services, etc.

J Direct SME financing facilitation is being supplemented by 'factoring' or discounting of their receivables against credit sales to buyers of good credit standing, easing pressure on their finances. Growing use of external credit ratings of businesses in financing decisions of lenders is helping factoring practices catch on.

J Access to equity finance support for SME entrepreneurs is also widening. For over a decade now, a government financed Equity and Entrepreneurship Fund (EEF) is extending up to forty nine percent in equity support to agro based and IT sector enterprises, including those of SMEs


(the EEF contributions are to be bought back by entrepreneurs within eight years, otherwise these get converted to debt). More recently, two similar venture equity support initiatives have also emerged in the private sector.

J BB's SME financing and other financial inclusion initiatives are conducted within the overall monetary growth envelop of a cautious monetary stance. The promotion initiatives aim at smoothing out the impediments to maintaining SME financing on adequate growth path (7.6 percent y-o-y in first three quarters of FY13)rather than at creating any undue surge in SME lending. End use surveys reveal satisfactory utilization; overdues (under 15 percent of outstanding) are lower than in farm credit.

Bangladesh's macroeconomic stability with decade-long above six percent annual average real GDP growth amply evidences that our SME financing promotion and other inclusive financing policy approaches have served the economy and financial sector well during and following the global financial crisis; protecting credit flows for productive activities and aiding stability both on the demand and supply sides amid global growth slowdown. We intend to pursue the promotional policy approaches further forward, also taking lessons from experiences elsewhere in global dialogue sessions such as this.


* Joint initiatives of Bangladesh Bank and CIRDAP for Development of SMEs July 14, 2013, CIRDAP International Conference Centre, Dhaka.

Pushing SME Initiatives Forward*

We take SME as the priority and we always give importance to communications and joint initiatives with different stakeholders. Within the country we are taking lot of initiatives with different organizations like Ministries, SME Foundation, EPB, BSCIC, Chambers, Women Chambers including Banks and NBFIs. Our initiatives are now going beyond the country. We organized different programs with international organizations, donor agencies and even with different High Commissions and Embassies. For SME development, joint initiatives both nationally and internationally are very important and we are committed to continue such initiatives. Ours is an exceptional central bank which is taking a lot of field focus initiatives for the sake of unserved and undeserved people for accelerating inclusive growth process. Financial inclusion is our motto and we are trying to achieve it through financing agriculture, micro, cottage and small enterprise activities. Due to such efforts, Bangladesh economy is now on a very strong footing despite on-going world recession.

I am indeed pleased to know that Bangladesh Bank is going to work with CIRDAP on SME sector. I think this is a very good idea which aims at talking joint initiatives with CIRDAP for pushing SME initiatives forward regionally and globally. CIRDAP member countries are also involved in SME activities and they also feel that SME initiatives are crucially important for hastening inclusive growth of individual country.

I feel especially enthused about all local, regional and global initiatives for SME promotion and development and believe there is ample scope for deepening mutually beneficial cooperation and support between SME policymakers and stakeholders of the CIRDAP member countries. I heartily congratulate CIRDAP for taking this initiative.

I think it is a timely decision for both Bangladesh Bank and CIRDAP and they have signed a Memorandum of Understading (MOU) to cooperate with each other for the development of SMEs in Bangladesh. With this MOU,


entrepreneurs, policymakers and other stakeholders related to SME sector of Bangladesh will be able to share and upgrade their knowledge with the counterparts of CIRDAP member countries. I hope this MOU will be effectively implemented.

I wish that both the organizations will work with dedication in different areas and develop overall SME environment for the benefit of cottage, micro, small and medium entrepreneurs. I wish the best success of today's program with engaging, interactive deliberations.

Let me conclude here, looking forward to further deepening of relation with CIRDAP member countries.

* Talking Points at AFI 2013 Global Policy Forum Session at Sasana Kijang, Kuala Lumpur, Malaysia.

Optimizing Impact through Synergizing Financial Inclusion*

Financial inclusion initiatives in Bangladesh seek to reach out to micro and small enterprises of poorer population segments with financial services they need. Financing under this initiative is based on lenders firsthand knowledge about the borrowers financing need for the productive pursuit, a KYC that goes deeper and further than that needed by mere AML CFT concerns.

The AML CFT concerns are addressed with CDD (customer due diligence drill) proportionate to perceived risks, mainly with size and frequency limits on transactions. The size and frequency limit imposed on the first go may not always be fully appropriate but can be revised on trial and error basis.

Financing under our inclusion initiatives in Bangladesh have not therefore impaired stability of the financial sector in any way. Rather, these have enhanced both real and financial sector stability synergistically.

In the real sector, the inclusion initiatives are generating incremental output on the supply side, and incremental employment and income on the demand side to absorb the incremental output.

In the financial sector, the inclusion initiatives are diversifying the asset bases of the lenders; reducing risks posed by exposures to large borrowers. Also, the inclusion initiatives are amassing small deposits from the poorer population segments these are supporting; these small savings that used to be stashed at home as cash or to be attracted by unsafe pyramid schemes cooked up by unscrupulous operators. These small deposits are expanding their base of



stable funding that are much less footloose than large deposits from a few urban borrowers.

Although formal impact studies on our inclusion initiatives are yet to be taken in hand, the aggregate benefits are by now fairly evident in country's aggregate economic and financial performance. Because of attention of our inclusion initiatives to agricultural and SME financing, these sectors did not suffer any credit crunch during the global financial crisis or afterwards. Food crop import needs have gone down drastically with unbroken spell of steady domestic agricultural output growth; real GDP has been growing at about six percent rate for over a decade now. Inflation in the single digits and on declining trend. Besides this stability and growth in the real economy, the financial sector also remained stable during the global financial crisis. Rather than needing any support for themselves during the crisis, our banks and financial institutions could extend support to the affected real sector like export manufacturers facing weak external demand. Lately we have been paying close attention to consumer protection issues side by side with AML?AFT issues in our financial inclusion initiatives. The enhanced integrity assurance afforded by this attention is again in synergistic virtuous circle relationship with stability in the real and financial economy; safer formal channel made accessible by the financial inclusion initiatives are steadily diminishing the lure of the unsafe shady informal channels and pyramid schemes.

SSBs need to be persuaded to engage intimately with inclusion initiatives promoters; for fully appreciating the spirit of the inclusion initiatives and positive behavioral changes these are bringing in to financing practices, reducing rather than heightening riskiness. That would be a welcome change from their familiar posture of looking askance at inclusion initiatives, based on traditional preconceptions about motive and behavior in conventional lending practices.

The proposed joint AFI-SSBs peer learning working group to develop a comprehensive framework for managing all risks associated with diverse financial products and services promoted in the Financial Inclusion (FI) initiatives is an excellent idea.

Engagements in working group sessions drawing together AFI members and the SSBs around a single table will promote:

(i) Understanding of AFI members about the full range of risks associated with new FI products and services they launch;


(ii) Heightened awareness of the SSBs about potential social instability risks and costs of financial exclusion, and their familiarity with the diverse country experiences in managing risks in FI initiatives; and

(iii) Co-ordination between SSBs in developing well integrated comprehensive risk mitigation frameworks, minimizing risk migration to less integrated segments of the financial systems.

The AFI proposal for the working group appropriately underscores the importance of taking full account of negative consequences of over indebtedness. Credit risk is the single largest risk in financing low income borrowers. Banks and financial institutions are using an online credit information bureau at BB collecting and furnishing debt status information on borrowers. MRA, the microcredit regulator, is setting up a separate credit information bureau for use by MFIs. As I mentioned earlier in the Frankfurt meeting, it will be important to avoid mechanistic credit score based indiscriminate lending that drove many rich economy households to insolvency in the global financial crisis, adhering instead to conventional need based, relationship based lending practices that have upheld asset quality in microcredit portfolios.

In introducing new FI products and services in Bangladesh we are adapting the relevant SSB recommended standards with risk based proportionality of rigor as deemed appropriate in local conditions. AML-CFT concerns are being addressed with KYC and STR requirements on all lending and financial services including those of MFIs, mobile phone/smart card based services and their local area agents; transactions in mobile phone based services are subject also to size and frequency limit prescription. Use of UNODC's Go-AML software for online reporting of STRs is being phased in gradually for STR reporting to the FIU at BB. Banks are subject to capital, provisioning and other prudential norms in line with Basel based SSBs. Microcredit operations of MFIs are subject to similar norms proportionately lighter rigor. Deposit insurance covers bank deposits up to prescribed limits; deposit taking by MFIs is subject to additional prudential limitations on solvency and liquidity concerns. Micro-insurance offered by insurance companies are under oversight of their sector regulator IDRA. In sync with global norms, financial system stability issues are getting increased attention after the global crisis; consumer interest protection concerns are also in forefront of supervisory attention on all new FI products and services.

BB remains willing to engage actively in the proposed AFI-SSBs peer learning working group, we expect it to create readily accessible


communication channel with all AFI members, making available a valuable repository of knowledge and experiences on comprehensive yet proportionate application of micro and macro prudential standards in FI initiatives of AFI members, helping make these sounder and more surefooted.


*"Banking Clients Through Mobile Money" 12 September 2013, Kula Lumpur, Malaysia

Fostering Mobile Phone Banking*

Over 100 million mobile phones are now in use of all Bangladesh's 152 million population, rich and poor, urban and rural. Fast penetration of mobile telephony everywhere in Bangladesh attracted attention early on for its high promise as a cost effective new financial inclusion instrument.

As elsewhere, Mobile Network Companies (MNCs) in Bangladesh were keen on launching their own mobile phone based financial services; but on prudential stability considerations BB opted for promoting this service in a bank led mode with the MNCs in partnering role on fee income basis. Taking this decision in favor of bank led model and developing regulatory guidelines for it in consultative processes took some time, which was why mobile phone based banking came about somewhat late in Bangladesh in 2011; Pakistan was first in this region to launch it in 2009.

Launched by two private sector banks, mobile phone based financial services are expanding very rapidly in Bangladesh; within two years well outpacing Pakistan according to CGAP data:

Mobile phone banking in Bangladesh still has vast potential for further expansion with new services and new banks besides the initial two as the Islami Bank has

Bangladesh (Q1, 2013) Pakistan (Q4, 2012)

Client account transaction volume

(Million USD equivalent) 1030 879

Average transaction size

(USD equivalent) 31 26

No of area agents, end of quarter (Thousands) 71 42

No of client accounts, end of quarter (Millions) 4.6 2.1


done lately. The number of mobile phone banking client accounts has nearly doubled further from the March 2013 the CGAP data above, now reaching 7.21 million. The numbers of area agents have risen to 108 thousands, transaction volumes have gone up correspondingly.

Thus far mobile phone banking transactions in Bangladesh comprise mainly money transfers including utility bill payments, salary disbursements and so forth; but mobile phone banking is now beginning to extend other services like deposit taking, loan disbursement and loan recovery. Trial phases for introduction of these services are likely to be straightforward and brief after the much more complex initial phase of setting up secure glitch free software and connectivity; we expect these new transactions to take off rapidly before long.

Success factors contributing to rapid expansion of mobile phone based financial services in Bangladesh include:

(i) BB's proactive promotional stance, with support and facilitation by leading the setting up of a country wide financial sector connectivity infrastructure, and upgrading of payments system with online automated interbank settlement of paper based and electronic fund transfers;

(ii) Incentive for banks from a donor funded 'challenge fund' for innovation of cost effective off branch modes of remote delivery of financial services;

(iii) Flexible consultative approach in formulation of regulatory guidelines, avoiding overly prescriptive rigidity.

The Central Bank and the Telcos regulator BTRC are in continuing communication with each other. The understanding in discussions between the two regulators is that the Telcos regulator will oversee operations of Telcos network services in the bank-telco partnerships for mobile phone based financial services; while BB will regulate the financial side of the mobile phone based financial services in the bank-telco partnerships. The idea is of requiring the partners to stick strictly to areas of their own competence.

Bangladesh Bank will continue attaching high priority for fostering mobile phone based banking as a powerful tool for easing hardships of livelihood of poorer population segments, like enabling rootless urban laborers from rural hinterlands to send money home at affordable cost from daily earnings for subsistence of dependents at village homes.


*Launching Ceremony of 'EBL Projukti 06 October 2013, Panpacific Sonargaon Hotel, Dhaka.

Bringing Efficiency in to Agriculture*

I am delighted to be here at the launching ceremony of this unique product for Agri Loan named 'EBL Projukti'. It is great to know that EBL has thought of such a product for our farmers for more efficiency and productivity in our agriculture. I really feel good when I see something positive about agriculture as it lies very close to my heart. Bangladesh is a fast growing developing country. The contribution of agriculture to its growth momentum is huge.

Almost three-quarters of Bangladesh's people live in rural areas, and most of them are directly or indirectly dependent on agriculture for their survival. Around half of the country's total labor force is engaged in agricultural activities. Our poverty is declining faster and living standard particularly in the rural area is improving because of agriculture. Our current per capita GNI has recently crossed the lower middle threshold of 1036 dollar reaching to $1044. We are food self sufficient due to the contribution of agriculture. Our growing international reserves that make a historical high of USD 16 billion is indirectly because of agriculture as we do not need to spend a single penny for food import.

Recognizing this importance to livelihoods, the government's agriculture-supportive initiatives, including a significant amount of agricultural credit disbursement by banks, helped markedly to maintain the country's six-plus percent average annual real GDP growth for more than a decade. In line with the national agricultural policy, Bangladesh Bank provides appropriate policy supports and guidance for enhanced agriculture financing through its annual agriculture credit policy.

The new agriculture loan disbursement exceeded target by 4 percent in the last FY with the active participation of the state-owned banks and private local and foreign banks along with the specialized banks. I would like to thank them for their positive response in this regard.

The government has aimed to attain GDP at 8 percent by 2015. Agriculture is a sector which is vital for advancement of the rural area. You all are aware of the Agricultural and Rural Credit Policy and Program for the Fiscal Year 2012-13. BB has encouraged expansion of Agri and rural credit as well as expansion of banking activities in rural areas, cultivation of import substitute crops, inventing new


banking products, etc.

The unique product for agriculture loan brought by EBL, 'EBL Projukti' is definitely going to be very useful to our farmer brothers and sisters. Use of modern and advanced machines and equipments in cultivation is the necessity of time. Due to the lack of credit facility many farmers fail to buy and use such equipment. I believe this product will give them a better opportunity to avail. My warmest wishes to the farmers who are working very hard every day towards a self sufficient country on food.

PART FOURMicrofinance and

Non-bank Financial Institutions


Microfinance Pricing Transparency*

Microfinance sector of Bangladesh has caught attention from all over the world due to its special nature of financial products for financially excluded sections of the society. In Bangladesh, the access of people involved in the economic activity in the rural market to banking services is not sufficient with respect to their contribution to GDP. According to Bangladesh Bank's statistics in FY 2008 the share of agriculture sector in GDP was 24% whereas the share of credit to this sector stood at 7% as of June 2008.

A large portion of the population of low income brackets both in rural and urban areas has a limited reach to the financial services. Therefore, financing this group of population for economic activity is a long standing demand that has been high on the agenda of the economists and the policymakers. Apart from agricultural credit of banking sector, Grameen Bank and nongovernment microfinance institutions (NGO-MFIs) are playing significant role through microcredit programs to boost up the rural economy in the country. With efficient disbursement and recovery position, their disbursement during FY08 amounting Taka 186.4 billion, is much higher than the agricultural loan disbursement of the banking sector. Microcredit sector in Bangladesh could indeed take pride on its substantial achievements especially in terms of outreach, sustainability and its impact on the borrowers. There is no doubt that microcredit can contribute in significant way to poverty reduction. However, microcredit program has to be integrated with macroeconomic policies.

To integrate these NGO-MFIs with the main financial market through a regulatory system, the government of Bangladesh established Microcredit Regulatory Authority (MRA) under "Micro credit Regulatory Authority Act 2006". This Authority is empowered and responsible to monitor and supervise the micro credit activities of these institutions. NGO-MFIs previously known as semi-formal sector now are being considered as part of formal financial market though there are many steps to go ahead.

Efficient pricing of microcredit requires that the interest rates charged on

*Seminar on 'Microfinance Pricing Transparency' held at Dhaka on 11 August 2009.


loans are market based, i.e., determined by the demand-supply condition in the microcredit market. However, some critical aspects of such type of loans prevented the market behave competitively. One factor is asymmetric information in the microcredit market which leads to large screening costs for the lenders and thereby higher interest rate to cover their costs. Besides, small loan size, operating and administrative costs are relatively higher in microfinance compared to other commercial loans. The following are important factors to consider when an MFI decides an interest rate:

J Administrative expenses, including rent and utilities, salaries, travel and transportation, office supplies, etc.

J Inflation and depreciation

J The cost of loan losses

J The cost of the funds that the MFI borrows from banks, refinancing source like central bank, low cost borrowers' saving

J Method- flat or declining?

J Amortization schedule- grace period benefits?

J Compounding periods- daily, weekly, quarterly, half-yearly or annually?

J Use of Information Technology (IT) can bring down operational costs

J Quality of governance also impacts operational costs (e.g. perks to top officials)

The Consultative Group to Assist the Poorest (CGAP) has designed a straightforward method to allow MFIs to determine what effective interest rate they need to charge in order to achieve financial viability. The interest rate required for financial sustainability is determined by five elements: administrative expense rate, targeted capitalization rate, loan loss rate, the market cost of funds rate and investment income rate.

Are the rates unreasonable? One approach is to compare MFI interest rates to the rates on other kinds of small loans that lower income people use. The idea is that making lots of small loans will inevitably cost more than making a few big loans, so what kind of rates are charged by other small lenders? The most powerful approach to the question of whether interest charges are too high is to look at the individual cost items that those charges cover (cost of funds, loan losses, and administrative costs) and the profit that's left over after paying the costs.

MFIs must find innovative ways to improve their productivity and efficiency, and reduce operating costs. Essential to this process is cost-reducing innovations. Government can help facilitate innovation in the microfinance industry by recognizing and rewarding innovators, thereby encouraging further innovation. Similarly, government can help ensure that information on more efficient MFIs is disseminated widely.

Financial and price transparency is one of the main steps among them. In economics, a market is transparent if much is known about: What products, services or capital assets are available; At what price; and where.


There are two types of price transparency: 1) I know what price will be charged to me, and 2) I know what price will be charged to you. The two types of price transparency have different implications for differential pricing. A high degree of market transparency can result in disintermediation due to the buyer's increased knowledge of supply pricing. Transparency is important since it is one of the theoretical conditions required for a free market to be efficient.

In Bangladesh, central bank directly regulated price of financial products of banking sector for long time, which has been relaxed with the progress of deregulation. Banks have been advised to announce the mid-rate of the limit for the products different sectors and the banks may charge interest 1.5% more or less than the announced mid-rate on the basis of comparative credit risk. However, this type of practice could not be introduced for the microfinance sector yet.


development activities, with continuing dependence on donor support.

Coming to the conference theme of who benefits from regulation of microfinance, the short answer is: everybody. The MFIs themselves are the foremost beneficiaries. For sustained operation they require continuous mobilization of funds in varying feasible mixes of borrowing, deposit taking and equity. Success in such fund mobilization depends on transparency and performance soundness in respect of loan portfolio management, liquidity and solvency, facilitated hugely by operation under licensing and supervision of regulatory authorities. The rural and urban poor benefit from microfinance regulation, with reliable access to microfinance on fair and equitable terms. Lenders and depositors benefit from microfinance regulation with safer, fraudulence-free investment and savings options in the MFIs. Lastly, the government and the general public also benefit from regulation of microfinance, with added safeguard against systemic instability, fraudulence and money laundering.

Designing appropriate microfinance regulatory regimes is still globally an ongoing work in progress. While differing in specifics according to country circumstances, the general features of the desirable regimes are by now well recognized. Besides addressing concerns about consumer protection, money laundering prevention and systemic stability, a well-designed microfinance regime will aim at nurturing MFIs into gradual growth and maturation as entities in the formal financial sector; shepherdingthe numerous small operating MFIs towards merger and consolidation into fewer, larger and self-sustaining entities. MFIs accepting deposits only from their member-borrowers pose no risk for systemic stability, the deposits in effect being cash collaterals for loans drawn. Non-prudential regulations requiring good governance with clear accountabilities, sound lending practices, fairness in fees/charges and in redressing customer grievances, adequacy and transparency in financial disclosures largely suffice in regulating such non deposit taker MFIs. Clear separation of microfinance functions from other activities as social development NGOs is important for transparency. KYC and other anti-money laundering routines for MFI clients, appropriately risk graded, will generally be simpler and less onerous than those for bank clients. Most NGO MFIs in Bangladesh were set up as non-profit trusts. Equity stakes for member borrowers in the MFIs (as in co-operatives and the Grameen Bank) can enhance their sense of belonging, besides enhancing the poverty reduction potential of the MFIs. Regulatory guidance on ownership structures for MFIs will facilitate their borrowing from banks and other formal financial institutions.

The larger MFIs accepting deposits from non-members can pose potential systemic risks, warranting prudential regulations (capital adequacy, reserve and provisioning requirements, etc.) in line with those for banks and other deposit taking supervised financial institutions. Nurturing and shepherding of the numerous small operating MFIs into larger well-functioning regulated entities will warrant more of close attention of micro-credit regulatory authorities over the medium term. In Bangladesh the Microfinance Regulatory Authority (MRA) chaired by Governor, BB (also the head of the country's apex financial sector regulator), came into existence in July 2006. Operating MFIs applying for


licenses ran into thousands, not counting those failing to apply in time. Of these, only around five hundred could be issued license in the first phase, based on eligibility criteria including a minimum required size. Applicant for MFIs not meeting the licensing criteria were allowed time up to June 2009 to fulfill the requirements including minimum size. MFIs subsequently qualifying for license numbered in tens rather than hundreds, and the MRA is now faced with the choice of weeding out a very large number of non-compliant but operating applicants, or to allow them further time and more hands-on guidance for merger and consolidation into required minimum size. Encouraging the larger, more efficient MFIs to subsume operations of smaller ones as subsidiaries could be among the options meriting consideration.

The relatively higher interest rates and charges/fees remain a persistent, biting criticism of micro finance, albeit more from populist political authorities rather than from actual borrowers. The higher costs involved in supervision of small loans to borrowers in dispersed locations cannot be wished away or regulated away; unduly obstructing cost recovery will only hurt sustainability of the MFIs, narrowing access of the poor to microfinance loans. Regulators and government authorities can however encourage and support MFIs in minimizing supervision costs, to the extent possible adopting remote loan delivery and recovery mechanisms in partnership with mobile phone companies and IT platforms offering card based financial service delivery. BB is actively encouraging such partnerships. Apart from possible cost minimization, consumer protection aspects of microfinance regulation will also help, with vigilance against unfair, extortionate charges or fees.

Issues facing microfinance regulators in other countries are unlikely to be vastly different from those in Bangladesh mentioned here, and I believe the deliberations in this seminar will be helpful in drawing up clearer roadmaps for microfinance regulation in Bangladesh and elsewhere. Microfinance regulators in country jurisdictions can take advantage of the technical expertise and assistance available from multilateral forums like the CGAP, bilateral development partners, and globally active philanthropies.


Microfinance Regulations for Development - Global Experiences*

Micro-finance performance and regulation experiences of countries in Asia, Africa and Latin America are covered by paper presenters from the respective regions. Apart from country experiences, presentations by leading exponents and pioneers of micro-finance cover general trends and policy challenges on key issues like ownership, governance and resource mobilization, and the Basel Committee proposals on principles of microfinance supervision. This richness in content makes this publication a very valuable reference book for micro-finance practitioners and researchers in Bangladesh and abroad. This is indeed a timely publication, particularly in the backdrop of an intense debate on the impact of micro-finance on poverty reduction and the state of governance structure of the MFIs for quite some time in recent days.

Just as playing a pioneering role in extensively using micro-finance for creation of self employment for the poor, Bangladesh has also played a pioneering role in supervision and regulation of micro-finance, with the establishment of the Microcredit Regulatory Authority (MRA) in 2006, which is licensing and regulating micro-finance institutions in Bangladesh. Important recent moves by MRA include rationalization of lending interest rates and interest charging practices of micro-finance institutions, limiting the lending rates within 27 percent per annum, at median level of the wide range of declared lending rates of these institutions. This is a declining rate as well. The upper limit worked out in consultation with micro-finance institutions takes due account of their loan funding and supervision costs at reasonable efficiency levels while restricting tendencies of some micro-finance institutions to charge unduly high interest to build up investment funds or to fund unduly opulent lifestyles for their senior managements.

Micro-credit for self-employment of the poor is a major innovation by now

*Launching ceremony of the publication on "Microfinance Regulations for Development - Global Experiences", organized by Microcredit Regulatory Authority (MRA) on 11 June 2011.


replicated worldwide as a tool for combating poverty. Today micro-finance is regarded as an important financial inclusion tool promoting broad based inclusive growth with social and financial empowerment of the excluded poor. Unlike some past initiatives that proved mostly unworkable or unsustainable in redressing exclusionary traits of formal financial markets; micro-finance has already proven its potential as a sustainable, effective remedy against financial exclusion; despite some valid skepticism about its capacity to reach out to the extreme poor. I hope this publication will be able to address at least some, if not all, of these burning issues.


*Roundtable on Microfinance for Poverty Alleviation: What's Right and What's Wrong?organized by Centre for Policy Dialogue, 26 July 2011.

Microfinance for Poverty Alleviation: What's Right and What's Wrong?*

I would like to congratulate Professor David Hulme and Thankom Arun on deliberation of their insightful paper titled 'What's Wrong and Right with Microfinance: Missing an Angle on Responsible Finance?' which attempts to explore the rights and wrongs with micro-finance and comes up with some recommendations to redress the shortcomings prevailing in the micro-finance sector.

The 'wrongs' identified in the paper are:

J Critics of microfinance often argue that microcredit hardly reaches 'poorest of the poor' and generally reaches a combination of poor and non-poor people. Loans are used for diversified purposes such as micro-enterprise, education and health expenses, repaying debt, on-lending, wedding celebrations and even dowry.

J Excessive enthusiasm of MFI field staffs in encouraging borrowers to take bigger and bigger loans often lead to the reason for 'micro-finance suicides'. Besides, in many instances, micro-credit is offered to the same set of households, encouraging multiple loans.

J Rate of interest on microcredit is claimed to be too high by many critics. However, the cost includes the cost of borrowing from banks, travel expenses of field staffs, debt write-offs which call for interest rates higher than the lending rates in the banking system.

J Oversupply of microcredit arising from rapidly expanded micro-finance industry leads to excessive debt burden to borrowers.

The 'rights' identified in the paper are:

J Microcredit offers increased choice to the near-poor and poor population segment of the society in accessing basic financial services like loans, savings and insurance.

J Microcredit adds to the vibrancy of local economic life by facilitating


production, exchange and consumption.

J Microcredit improves access to micro-saving services.

J Microcredit contributes to enhance social benefits with greater emphasis on female borrowers leading to active participation of women in the economic activities and decision making process.

The paper identifies the following 'observations' on Micro-credit in Bangladesh:

J The impact of microcredit is substantial in Bangladesh in offering greater choice of financial services to the poor and reducing poverty.

J In Bangladesh MFIs charge fair rates of interest given the relatively high administrative costs of micro-loans and micro-savings. The intense competition between MFIs means that interest rates are very much 'market' set.

J Bangladesh may have been developing a smaller scale credit bubble in the late 1990s. But this bubble never burst, as key players in the micro-finance market appear to have spotted the problem and decided to consolidate, rather than expand, their loans portfolios.

J MFIs in Bangladesh have a tool that Indian MFIs don't have. Bangladeshi MFIs hold 'compulsory savings' from clients and if a client gets into difficulties with repayments these savings provide a buffer to manage a potential default.

Safe-Save in Bangladesh employs female slum-dwellers to be 'collectors' in the settlements where they live. They have detailed knowledge of their clients and as neighbours; they treat their clients with respect.

The recommendations are as follows:

J Greater transparency should be ensured in terms of charges, terms and conditions.

J MFIs can introduce low cost systems to reduce the likelihood of client abuse and improve social performance.

J MFIs should examine the ways of assessing field staff performance and should try to reform them quickly with the aim of ensuring higher quality relationship between field staff and borrowers.

J Regulators should be cautious about setting interest rate ceilings on micro-credit, since setting lending rate too low without considering high administrative costs associated with micro-finance would reduce financial services offered to the poor people.

Micro-finance, the lending of small sums for income generating self-employment pursuits to people of small means with little or nothing to offer as collateral has over the years grown in profile globally as a major financial tool for combating poverty. Bangladesh, with her leading role in the launching of this poverty combating instrument, established Microcredit Regulatory Authority (MRA) in 2006 with a view to licensing and supervising the micro-finance institutions within a regulatory framework. Let me recount the very


short summary of our micro-finance institutions' status and poverty trend. The total disbursement and recovery by large MFIs (Grameen Bank, BRAC, ASA, TMSS, and BURO Tangail) in FY 2010 were Taka 252.94 billion and Taka 229.68 billion respectively and the total outstanding loans stood at Taka 150.05 billion (USD 2.1 billion) to more than 20 million poor borrowers whereas the overdue as percentage of outstanding improved to 3.73 % in FY 2010 from 3.79% in FY 2009. Poverty (upper poverty line, 2122 kcal food intake) in Bangladesh declined from 57% to 49% of population during the 1990s and twice as fast in the following 5 years to 40% in 2005. Poverty reduction slowed down somewhat in the global downturn; but regained pace subsequently with rising urban and rural real wages. The BBS Household Income and Expenditure Survey (2010) reported poverty at 31.5% in 2010. The recent global financial crisis and growth slowdown has further underscored the relevance of micro-finance in upholding domestic output and demand. In addition micro-finance has also been able to develop a stronger base of self-employment based social safety net in addition to conventional public safety net system which is quite robust.

The rural and urban poor benefit from regulated micro-finance with reliable access to micro-finance on fair and equitable terms. Lenders and depositors benefit from regulated microfinance with safer, fraudulence-free investment and savings options in the MFIs. The government and the general public also benefit from regulation of micro-finance, with added safeguard against systemic instability, fraudulence and money laundering. For sustained operation, MFIs require continuous mobilization of funds in varying feasible mixes of borrowing, deposit taking and equity. Success in such fund mobilization depends on transparency and performance soundness in respect of loan portfolio management, liquidity and solvency; facilitated hugely by operation under licensing and supervision of regulatory authorities.

Designing appropriate micro-finance regulatory regimes is still globally an ongoing work in progress. While differing in specifics according to country circumstances, the general features of the desirable regimes are by now well recognized. MFIs accepting deposits only from their member-borrowers pose no risk for systemic stability, the deposits in effect being cash collaterals for loans drawn. Non-prudential regulations requiring good governance with clear accountabilities, sound lending practices, fairness in fees/charges and in redressing customer grievances, adequacy and transparency in financial disclosures largely suffice in regulating such non-deposit taker MFIs. The larger MFIs accepting deposits from non-members can pose potential systemic risks, warranting prudential regulations (capital adequacy, reserve and provisioning requirements, etc.) in line with those for banks and other deposit taking supervised financial institutions.

Clear separation of micro-finance functions from other activities as social development NGOs is important for transparency. The relatively higher interest rates and charges/fees remain a persistent biting criticism of micro-finance, albeit more from populist political authorities rather than from actual borrowers. Regulators and government authorities can however encourage and support MFIs in minimizing supervision costs, to the extent possible adopting remote loan delivery and recovery mechanisms in partnership with mobile


phone companies and IT platforms offering card based financial service delivery. BB is actively encouraging such partnerships.

The present Government has published the 'Microcredit Regulatory Authority Guidelines 2010' as the gazette to augment the pace of regulation and supervision of the MFIS. There are also some recent moves by MRA including rationalization of lending interest rates and interest charging practices of micro-finance institutions, limiting the lending rates within 27 percent per annum, at median level of the wide range of declared lending rates of these institutions and which is a declining balanced rate as well. Based on in-depth consultation, rules introduced recently will certainly improve the quality of governance of MFIs.


*National seminar on 'Asset Accumulation and Poverty Dynamics in Rural Bangladesh-The Role of Microcredit' organized by Institute of Microfinance (InM), 24 August 2011.

Asset Accumulation and Poverty Dynamics in Rural Bangladesh*

Let me start my comments with some context on how poverty has evolved since Bangladesh independence. Using the income poverty measure from the Bangladesh Bureau of Statistics, in the 1970s, three out of four Bangladeshis lived in poverty and the country was considered a test case for development. Rapid population growth, frequent natural disasters, and low economic growth throughout the 1980s suggested that a large number of households would remain trapped in chronic poverty. Defying this outlook, Bangladesh began experiencing more sustained economic growth since the 1990s, which was accompanied by impressive poverty reduction. For example, in 1991-92, about 60 percent of the population was below the poverty line; and by 2005 poverty had gone down to 40 percent. The latest numbers from 2010 HIES show that now the number of people below the poverty line has gone down further to 31%. In other words poverty has halved over the last twenty years in Bangladesh - something we should all be very proud of. What is also very reassuring is that the nationally representative survey conducted by InM also show very similar trends and so we can be very sure of this progress.

So what has driven this reduction in poverty? Declining population growth rates, improved human capital, higher agricultural productivity, better rural infrastructure, and increased foreign remittance have been put forth as factors explaining Bangladesh's enhanced growth and declining poverty. I am particularly impressed by the finding that despite higher inflation which is not always a domestic phenomenon, people have learned to know how to adjust to it, thanks to their growing purchasing power. That, of course, does not lead us to any monetary policy complacency. We still need to be hard hitting on this difficult nut called inflation which is indeed hurting the poor most.

But what was the contribution of micro-finance to this impressive performance? It is impossible to put an exact number but we can look at some published evidence to get a sense of where micro-credit is making a difference and where it may not be. The World Bank's 2008 Poverty Assessment has two


findings in this context. First, PKSF program coverage data suggests that since 2000, micro-finance has expanded more in areas that were poorer, presumably because the better-off geographical areas were covered in the previous decade. Secondly, the report shows that the reduction in poverty in rural Bangladesh has been much more in upazilas where micro-finance membership increased more rapidly, after accounting for other factors which drive poverty reduction. There are other published papers which go beyond the geographical variation of micro-finance coverage and effects. Two well-known studies assess short and medium-term micro-finance impacts from the borrowers' point of view using repeated household surveys carried out in rural Bangladesh. Using nationally representative data, their findings suggest that poverty reduction among the borrowers due to micro-finance is 1.6 percentage points per year. Moreover, micro-finance programs have spillover effects on the non-borrowers-their poverty level goes down by 0.3 percentage point a year. Professor Osmani's study confirm these findings and shows the differential impact on poverty between those who use micro-credit for productive purposes and those households who use it for consumption needs.

Even without the income gains, the poor may still benefit from micro-credit services if it helps them withstand income and non-income shocks such as an economic disaster resulting from the sudden death of a productive family member, the loss of an economic asset or other natural disasters. Without some form of insurance (either public or private), the poor may not be able to smooth consumption during those disasters which may lead to sharp cut-backs in essential food and non-food expenditures. Several studies confirm that micro-credit programs help households partially insure against shocks so that they effectively play an important 'safety net' role. One carefully designed study finds that micro-credit borrowers are about 50 percent less prone to consumption fluctuation than their counterpart non-member poor households in Bangladesh. This study by Professor Osmani also shows that micro-credit prevents the poor from depleting their assets (including non-land asset) during times of crisis. In particular, Professor Osmani's focus on asset transition is very well taken. It is also heartening to know from this study that micro-credit creates more 'movers' than 'fallers' amongst the poor compared with the non-poor.

Clearly, further innovations are required to strengthen this crucial risk-reduction role, and in general to offer flexible financial services catering to different types of poor households in particular for the extreme-poor. One example is a micro-finance program known as PRIME implemented by PKSF which offers a flexible repayment schedule and consumption smoothing, as well as production, loans. I think micro-finance institutions need to strengthen their micro-insurance type products so that they go beyond the traditional life insurance for the death of a borrower but also include health insurance and crop insurance.

The discussion on the impact of micro-credit would be incomplete without referring to the broader package of interventions that are provided with it. MFIs in Bangladesh vary significantly in terms of their noncredit services though they typically include training, related business development services and social


messages on education, health and civic rights. One published paper finds that these noncredit interventions raise self-employment profits in rural Bangladesh by 125 percent while the combined impact of credit and noncredit interventions on self-employment profits is 175 percent.

The impact evaluation literature on micro-finance in Bangladesh also contains some cautionary notes. For example, it is clear that not all borrowers benefit equally as it depends on their local economic environment, their entrepreneurial ability and the extent their income sources are diversified. A few studies also show that micro-credit does little to change gender inequities by limiting female control over loans. However, on balance there is more evidence suggesting that micro-credit does influence gender relations positively. Most published papers show that access to micro-credit leads to women taking a greater role in household decision making, having a greater access to financial, economic and social resources and having greater mobility in Bangladesh.

It is clear that micro-finance can protect households from shocks, contribute to changing societal norms about the role of women in society and lead to some households moving out of poverty. Overall, it has played its part in the impressive progress Bangladesh has made in poverty reduction over the past two decades. Clearly, not everyone utilizes loans productively and there is a risk of falling into over-indebtedness. So, the role of micro-finance should be strengthened through further innovations including better micro-finance products which take into account these pitfalls. Some of these pitfalls can certainly be avoided if we can develop a good culture of prudential regulations. All MFIs should, therefore, welcome rigorous supervision and monitoring by regulators for their own partied benefits in the arena of ensuring good governance. This will help avoid many of the unnecessary controversies arising out of management system including succession plans of MFIs and also issues around adherent to various dimensions of micro regulations by their institutions. All this help improve the scope of sustainability of both the borrowers and MFIs in the long run. Finally, micro-finance is not a panacea and will clearly not eliminate all poverty in any country.

Thus, the potential of micro-finance can be best exploited by recognizing the lessons from careful impact evaluation studies, strengthening programs on the basis of this research and field experience, and by incorporating micro-finance programs into Bangladesh's overall poverty-reduction strategy. I believe this study does this and is a very useful contribution to the debate on micro-finance. It is through carefully designed empirical work that the perception gaps on micro-finance will slowly be bridged and the debates will become less polarized in their opinions


*Report launching ceremony for 'State of the Microfinance Sector: Bangladesh 2011,' organized by BRAC Development Institute (BDI), 25 August 2011.

State of the Microfinance Sector: Bangladesh 2011*

This report is a very important milestone for the micro-finance industry in Bangladesh. An industry of this size and stature needs a regular careful assessment of this type. It is useful for policymakers, for program managers and the general public. I would therefore like to congratulate the BRAC Development Institute for taking this important initiative. The report is indeed comprehensive and provides a well laid out structure of the financial system including micro-finance, both regulated and unregulated. The report correctly points out that the active borrower numbers and portfolio size have increased steadily over time and their contribution to financial inclusion is substantial. Besides, efficiency and portfolio risk of Bangladesh MFIs have also been assessed with well developed tools. Sources of finance, particularly the role of member deposit have also been covered adequately. I do not want to go into technical details at this point as most of these have been already discussed at length by competent panelists.

I would, however, like to make three related points today. The first relates to the role of micro-finance within the Bangladesh Bank's goal of fostering financial inclusion. Financial inclusion essentially aims to provide flexible financial services - savings, insurance and credit - to those who currently do not have access to these services. The Central Bank is committed to advancing this agenda and as many of you know we have taken a number of initiatives to promote financial inclusion. These include the creation of 10 Taka account; promoting credit to sharecroppers in partnership with BRAC; the licensing of mobile phone banking and the SME refinancing window. We are also encouraging banks to develop partnership with MFIs for delivery of agricultural credit.

While these are specific initiatives perhaps the most important role that the Central Bank, and more generally the government can play, is creating a conducive environment for NGO and private sector initiatives for financial inclusion to flourish. This conducive environment starts with providing the


macro-economic fundamentals for financial inclusion. A critical ingredient in this is ensuring that the monetary policy instruments we have at our disposal contribute to robust economic growth while ensuring that inflation remains under control. Economic growth is essential to generate the demand for the enterprises developed by micro-finance and stable inflation is necessary to ensure that the progress poor people make from having access to savings, insurance and loans is not eroded away. So while the world of macro-economic policy may seem miles away from that of micro-finance, they are in fact very inter-linked.

Another element which is essential for the overall conducive environment for micro-finance relates to regulatory oversight. Bangladesh has achieved scale in micro-credit in an unprecedented manner and one of the reasons it has managed to do so relates to the relatively light touch regulations that the industry faces. We are striving to achieve the balance of ensuring that micro-finance institutions have the space to innovate while maintaining oversight of poor people's money. We have set up the MRA to achieve this balance and we aim to strengthen its capacity to achieve these goals. Another regulatory issue which we are dealing with now relates to mobile phone banking. We have allowed various initiatives and partnerships to take shape and we have observed how these are playing out. Now we have developed draft guidelines to ensure a level playing field for mobile phone banking which we are sure will be a key component of achieving our financial inclusions targets. We put those guidelines on our website and have received valuable comments, including from CGAP, which we will incorporate. So broadly the first message I would like to leave behind today is that we remain committed to maintaining a stable macro environment and a regulatory environment which safeguards people's money while ensuring that micro-finance institutions have the flexibility to develop financial products to suit poor people's needs.

The second message that I would like to leave behind is that performance of the Grameen Bank has not been and will not be left to founder following retirement of its pioneer Nobel Laureate Dr. Yunus. With a delegated structure of operational management the Grameen Bank retains firm footing as one of the country's top three micro-finance providers. The Government is in the process of appointing a capable, innovative new CEO for it, with the help of a search committee comprising personages of international repute. So, there is no uncertainty about the future of micro-finance despite some sharp reactions in the media and civil society regarding this industry following the change in leadership in Grameen.

The third message I would like to stress as we look forward is the importance of understanding why a substantial number of households in Bangladesh still lack the full range of financial services that are essential for insuring against shocks and investing for the future. By the full range of services I mean insurance options, savings products and credit. Where Bangladesh has done well is in the provision of credit although there still remains a gap in the provision of credit for 'meso' type activities which are between micro and small enterprise. There are also a number of savings products available but even here there are clear gaps; - micro-credit borrowers can save with the MFIs but other


poor households who are not MFI members still struggle to find safe places to save. However the biggest gap is in developing insurance products for the poor, particularly health insurance and crop insurance. Let us work together - regulators, program managers, development partners and the private sector so that poor households can insure themselves against the most common type of shocks - health shocks and crop losses - which often cruelly reverses the steady gains that our hard-working country men and women achieve. There are examples across the world for innovations in this area and so we ought to be able to replicate these here.


*Keynote speech on 'Microfinance in Bangladesh: Challenges and Future Directions', organized by PKSF on 3 November 2011.

Microfinance in Bangladesh: Challenges and Future Directions*

Let me share four issues which I think are important when we take a forward-looking view of micro-finance.

Bangladesh has achieved scale in micro-credit in an unprecedented manner and one of the reasons it has managed to do so relates to the relatively light touch regulations that the industry faces. We are striving to maintain the right balance of ensuring that micro-finance institutions have the space to innovate while maintaining oversight of poor people's money. We have set up the MRA to achieve this balance and we aim to strengthen its capacity to achieve these goals. However, the MRA also needs to focus and as the regulator of the overall financial system and as chair of the MRA board, my priority is that the MRA focuses on regulating the large and medium MFIs first as problems with these MFIs could impact the whole system. Yet small NGOs are also an important part of the micro-finance scene and often they offer innovative products. A key issue for all types of MFIs is the need to improve corporate governance. It is essential that board members meet 'fit and proper' criteria and that strong and independent boards scrutinize audited accounts and can take strategic decisions about the MFIs. Another regulatory issue which we are dealing with now relates to mobile phone banking. We have allowed various initiatives and partnerships to take shape and we have observed how these are playing out. Now we have developed guidelines to ensure a level playing field for bank-led mobile phone banking which we are sure will be a key component of achieving our financial inclusion targets. It will be interesting to see, for example, how MFIs and banks licensed to do mobile phone banking might begin to interact and change the landscape of financial inclusion. For example, collecting loans repayments over the mobile phone or co-operating to deliver bank based deposit services. So broadly the first message I would like to leave behind today is that we remain committed to a regulatory environment which safeguards people's money while ensuring that micro-finance institutions have the flexibility to develop financial products to suit poor people's needs and ideally strengthen corporate governance arrangements in parallel.


A second issue is that in Bangladesh, as in many low income countries, there are serious gaps in understanding basic financial concepts and applying numeracy skills, such as the ability to calculate rates of return on investments, the interest rate on debt; an understanding of the benefits and risks associated with particular financial decisions, including spending, borrowing and investing. The poor are sophisticated managers of their own money. But due to lack of basic knowledge of terminology and banking products, people have difficulty appreciating the features of new innovative products and services of banks and MFIs. The Bangladesh Bank will soon start a financial literacy program using radio, TV and internet to address some of these knowledge gaps. However, we need to work together on this and do consider how you can make it easier for your clients to understand exactly what products are being offered, what the interest rates are and what the advantage and disadvantages of the different financial products you offering are. If this can be done, MFI borrowers will have a wider choice of financial products.

Third, I would like to stress the importance of developing a micro-finance Credit Information Bureau. There has been a lot of talk about this for the last ten years but sadly little concrete action. I urge the industry to get together to make this happen as it is even more urgent than before. The reason is that the size of the industry has grown so much that it is important to know credit histories and we must strive to avoid over-indebting our clients. Multiple borrowing is often beneficial for the borrowers, but it can also be dangerous and a CIB is critical to helping us have better information on the borrowing levels of the poor. For micro-credit in Bangladesh to keep up with a larger market and evolving conditions it is essential we work together to build infrastructure like the CIB to support the industry. Moreover with the advent of mobile phone banking a microfinance CIB can truly revolutionize the industry like in other countries as loan officers can receive information about existing and potential clients on their mobile phone - in Bolivia, for example, if the client of one MFI goes and applies for another loan from a different MFI the CIB immediately sends that message to the mobile phone of the original loan officer. If we can really develop a proper CIB for Micro-finance borrowers this will then complement with BB's CIB and together we will have a larger architecture of financial transparency.

Finally, as we look forward let me leave all of you with a somewhat philosophical question: How does micro-finance in Bangladesh continue to evolve and innovate, keep pace with the modern world, without losing the important roots of why it started and how?

One answer I would be confident giving is that it begins and ends with the client. If clients continue to do well microfinance overall will prosper and there will be general public support for it. And for clients to do well, micro-finance institutions will need to modernize and in the process there could be painful transitions. At the same time while change is both natural and inevitable given the way technology is altering our lives, we also need to retain the history and traditions of these great micro-finance institutions which have made Bangladesh a better place to be and have made us very proud overseas.


*Roundtable on "Islamic Microfinance: An instrument for poverty alleviation" organized by South-East Asian Co-operation Foundation (SEACO) held at Dhaka on 20 March 2012.

Islamic Microfinance: An Instrument for Poverty Alleviation*

Amid ups and downs in the global scene Bangladesh economy has succeeded in maintaining stable and steadily rising pace in growth and poverty reduction. Annual real GDP growth has averaged around six percent over the last ten years, and income poverty has declined by more than two percentage points annually since 2005. Bangladesh is ahead of her higher income near neighbors in improvement of many social indicators like female enrolment in primary schools, infant mortality, malnutrition, etc. Nevertheless, with about thirty percent of the population still living in poverty, faster growth and poverty eradication remains a high, over-riding priority.

Micro and SME financing have been playing important role in Bangladesh in poverty reduction by creation of gainful employment opportunities which can be both wage and self-employment. Such a solid foundation of employment opportunities, particularly in the rural Bangladesh has ensured a strong platform of private social safety net complementing the existing public social safety net programs. All these programs have also expanded the scope for domestic demand which has been helping us in tiding over the global financial crisis. Since liberation of Bangladesh hundreds of micro-credit NGOs throughout the country have been providing financing for income generating self-employment pursuits of the poor. In recent past these microcredit NGOs have been brought under licensing and regulation as Micro Finance Institutions (MFIs) by a new Micro-credit Regulatory Authority (MRA) where the governor happens to be the Chair of the board of directors. I, in fact, work as a bridge between micro-finance and mainstream finance and try to regulate both in a strategic way so that we achieve maximum synergy between the two streams of financing. Besides MFIs, banks and financial institutions in the formal financial sector have also maintained engagement in micro as well as small and medium scale enterprise (SME) financing, with policy and refinance support of the government and Bangladesh Bank (BB). In fact, more than a third of MFI financing originates from the banking sources through an innovative bank-MFI linkage programs.


Lately, BB has subsumed the micro and SME financing policy support and incentive initiatives into a comprehensive Financial Inclusion campaign; Social responsibilities of banks and financial institutions as corporate entities (CSR) have been invoked in drawing them into this campaign. I am deeply gratified by the spontaneity and enthusiasm with which the entire financial sector has responded to the call for wider, deeper financial inclusion of all productive pursuits of the poorer under-served population segments. Both the formal financial sector and the MFIs are now busy in innovating viable cost effective options for reaching out with financial services to micro and SMEs. We at BB are putting in place the facilitating infrastructures, recently introduced facilities include fully automated online clearing and settlement of paper based and electronic inter-bank fund transfers, and online access to credit information on borrowers from the Credit Information Bureau at BB. Increasingly, banks are now partnering with mobile phone/smart-card based IT platforms for remote delivery of banking and financial services through locally active MFIs or other area agents in off-branch remote rural neighborhoods.

J Islamic banking has been thriving in the vibrantly growing Bangladesh economy, by now comprising a fifth of total banking sector assets and liabilities. Islamic micro-finance services in the economy are also growing healthily; with avid participation of the Islamic banks in the Financial Inclusion campaign. According to available data, Islamic micro-finance amounting to Taka 46.2 billion as of end December 2011 comprised 8.38 percent of total Islamic financing, increasing sharply from a mere Taka 2.8 billion or 0.93 percent of total Islamic financing as of end December 2009. The number of micro-finance clients has risen to 448734 as of end December 2011, from 211197 as of end December 2009. In other words, the client base has literally doubled over the last two years.

J I believe there is ample room for Islamic micro-finance to flourish much further, given the growing popularity of Islamic finance both among Muslims and non-Muslims. In Bangladesh, compliance of Islamic banks and financial institutions with Islamic Shariah principles are being overseen by their Shariah Boards; while soundness, solvency and capital adequacy of these institutions are being overseen by BB, in terms of prudential provisions for mainstream conventional banking, modified appropriately to fit in with Islamic financing modes. BB is also supporting and encouraging development of a local Islamic money market; some recent proposals for modification in the Bangladesh Government Islamic Bond Rules to this end are awaiting formal approval of the Government. IDB has embarked upon its Microfinance Development Program (IDB-MDB) which have three objectives i.e. Poverty Reduction, Providing Access to Islamic Finance for the Poor in IDB member countries and Development of the Islamic Financial Services Industry (IFSI). In this context, IDB wants to establish an Islamic Microfinance Institution (IMFI) in Bangladesh partnered with renowned local and international financial institutions having considerable technical expertise in Islamic micro-finance which will be the first such institution of its kind.


J In today's roundtable session I would like to call upon the Islamic banks and the Islamic windows of conventional banks in Bangladesh to pursue vigorous promotion of Islamic micro and SME finance, in step with the country's concerted efforts for faster poverty eradication with deeper and wider financial inclusion. While entering into partnering engagements with Islamic MFIs and area agents in off-branch locations, they would be well advised to exercise utmost care in steering clear of the money laundering/ hundi/ terrorist financing influences that may be active in different regions of the country.

Microfinance Activities by The Islamic Banks

(As on: December)

(Taka in Crores)

Name of Banks

Microfinance Total Finance No. of Clients

2011 2010 2009 2011 2010 2009 2011 2010 2009

Islami Bank Bangladesh Ltd.

4307.38 511 278 32410.02 29208 23900 439452 319859 208024

Social Islami 0.18 33.22 3.17 5390.86 3668.03 2658.06 N.A. N.A. N.A.

Al-Arafah Islami Bank Ltd.

3.58 1.5 1.21 7343.38 4868.13 3846.18 9282 6592 3173

EXIM Bank Ltd.

309.67 N.A. N.A. 9969.96

Total Islamic Banks

4620.81

(8.38% of

total finance)

548.72

(1.45% of

total finance)

282.38

(0.93% of

total finance)

55114.22 37744.19 30404.24

448734 (37.46% growth over the preceding year)

326451 (54.57% growth over the

preceding year)

211197

Source:Financial Administration Divisions/Central Accounts Departmentsof the Respective Banks


*Seminar on 'Towards a public policy on microfinance in Bangladesh' organized by PRI on 5 April, 2012.

Towards a Public Policy on Microfinance in Bangladesh*

Perhaps the most important role that the Central Bank, and more generally the government can play is creating a conducive environment for NGO and private sector initiatives for financial inclusion to flourish. This conducive environment starts with providing the macro-economic fundamentals for financial inclusion. A critical ingredient in this is ensuring that the monetary policy instruments we have at our disposal contribute to robust economic growth while ensuring that inflation remains under control. Economic growth is essential to generate the demand for the enterprises developed by micro-finance and stable inflation is necessary to ensure that the progress of poor people make from having access to savings, insurance and loans is not eroded away. So while the world of macro-economic policy may seem miles away from that of micro-finance, they are in fact very inter-linked. So irrespective of whether we have a policy on micro-finance this issue of macro-stability will have a profound impact on how the micro-finance industry shapes up in future.

Another element which is essential for the overall conducive environment for micro-finance relates to regulatory oversight. Bangladesh has achieved scale in micro-credit in an unprecedented manner and one of the reasons it has managed to do so relates to the relatively light touch regulations that the industry faces. We are striving to achieve the balance of ensuring that micro-finance institutions have the space to innovate while observing oversight of poor people's money. We have set up the MRA to achieve this balance and we aim to strengthen its capacity to achieve these goals. Another regulatory issue which we are dealing with now relates to mobile phone banking. We have allowed various initiatives and partnerships to take shape and we have observed how these are playing out. Now we have developed guidelines to ensure a level playing field for mobile phone banking which we are sure will be a key component of achieving our financial inclusion targets. Micro-finance


industry as a whole will certainly benefit from fast expanding mobile phone banking as this will reduce the cost of delivery and recovery of small loans in addition to improving transparent. In fact, some MFIs have already started applying this innovative financial instrument and thus contributing towards deeper financial inclusion. So broadly the first message I would like to leave behind today is that we remain committed to maintaining a stable macro environment and a regulatory environment which safeguards people's money while ensuring that micro-finance institutions have the flexibility to develop financial products to suit poor people's needs. I am not clear though whether we need a micro-finance policy to continue down this path.

A related point is about the role of micro-finance within the Bangladesh Bank's goal of fostering financial inclusion. Financial inclusion essentially aims to provide flexible financial services - savings, insurance and credit - to those who currently do not have access to these services. The Central Bank is committed to advancing this agenda and as many of you know we have taken a number of initiatives to promote financial inclusion. These include the creation of Ten Taka account; promoting credit to sharecroppers in partnership with BRAC; ensuring at least half of the newly opened bank branches in the rural areas; the licensing of mobile phone banking and the SME refinancing window. We recently documented these initiatives at a SAARC seminar on the role of Central Banks in financial inclusion and also highlighted the trade-offs that exist when promoting financial inclusion in the Central Bank. This type of strategic review at the delivery institution level is perhaps operationally more useful for us than an over-arching national policy on micro-finance.

It is clear that micro-finance can protect households from shocks by smoothening consumption, contribute to changing societal norms about the role of women in society and lead to some households moving out of poverty. Overall, it has played its part in the impressive progress Bangladesh has made in poverty reduction over the past two decades. Particularly in terms of strengthening self-employment hence complementing the ongoing drive for deeper social safetynet platform promoted by the government. Clearly, not everyone utilizes loans productively and there is a risk of falling into over-indebtedness. So, the role of micro-finance should be strengthened through further innovations which take into account these pitfalls. However the biggest gap in micro-finance is in developing insurance products for the poor, particularly health insurance and crop insurance. Let us work together - regulators, program managers, development partners and the private sector so that poor households can insure themselves against the most common type of shocks - health shocks and crop losses - which often cruelly reverses the steady gains that our hard-working country men and women achieve. There are examples across the world for innovations in this area and so we ought to be able to replicate these here.


Thus, the potential of microfinance can be best exploited by recognizing the lessons from careful impact evaluation studies, strengthening programs on the basis of this research and field experience, and by incorporating micro-finance programs into Bangladesh's overall poverty-reduction strategy. As Mr. Khan points-out micro-finance has in varying degrees been incorporated in the various key government documents such as the Sixth Five Year Plan and the earlier PRSPs and that perhaps is more important than having it as a stand-alone policy.


* 'Micro-finance in Bangladesh: poverty impacts and future directions', organized by Bandhan, Kolkata, India, 8 May, 2012.

Micro-finance in Bangladesh: Poverty Impacts and Future Directions*

I would like to start by thanking Bandhan, and specifically its founding head Mr. Chandra Shekhar Ghosh, for inviting me here today. Mr. Ghosh has made us proud. He started his career in BRAC in Bangladesh and then moved to India where he exported one of our most successful formulas to turn a small NGO into a large and effective institution. Now we have a lot to learn from Bandhan. For instance, the employer-job seeker matching service that they provide is something truly unique, as are many other of Bandhan's programs.

Today I will share some thoughts on micro-finance in Bangladesh, focusing on the extent of poverty impact before moving onto a few other forward looking issues related to the sector. Let me start my comments with some context on how poverty has evolved since Bangladesh's independence. Using the income poverty measure from the Bangladesh Bureau of Statistics, in the 1970s, three out of four Bangladeshis lived in poverty and the country was considered a test case for development. Rapid population growth, frequent natural disasters, and low economic growth throughout the 1980s suggested that a large number of households would remain trapped in chronic poverty. Defying this outlook, Bangladesh began experiencing more sustained economic growth since the 1990s, which was accompanied by impressive poverty reduction. For example, in 1991-92, about 60 percent of the population was below the poverty line; and by 2005 poverty had gone down to 40 percent and 25 percent respectively. The latest numbers from 2010 show that now the number of people below the poverty line has gone down further to 31%. In other words poverty has halved over the last twenty years in Bangladesh - something we should all be very proud of. What is also very reassuring is that the nationally representative survey conducted by Institute of Micro-finance also show very similar trends and so we can be very sure of this progress.

Similarly the progress in terms of reduction in many human development indicators is striking in Bangladesh. According to UN data sources, in the early nineties the infant mortality rate was 96 per 1000 children. In 2010 it is 38. In 1990 the percentage of the population who were literate was 38% and now it is


56%. In 1990 the fertility rate was 4.3 children per women. In 2010 it is 2.2 contributing to the sharp decrease in population growth.

But coming back to income poverty we need to ask - what has driven this reduction in poverty? Declining population growth rates, improved human capital, higher agricultural productivity, better infrastructure, and increased foreign remittance have been put forth as factors explaining Bangladesh's enhanced growth and declining poverty.

But what was the contribution of micro-finance to this impressive performance? It is impossible to put an exact number but we can look at some published evidence to get a sense of where micro-credit is making a difference and where it may not be. The World Bank's 2008 Poverty Assessment has two findings in this context. First, program coverage data suggest that since 2000, microfinance has expanded more in areas that were poorer, presumably because the better-off geographical areas were covered in the previous decade. Secondly, the report shows that the reduction in poverty in rural Bangladesh has been much more in sub-districts where micro-finance membership increased more rapidly, after accounting for other factors which drive poverty reduction. There are other published papers which go beyond the geographical variation of microfinance coverage and effects. Two well known studies assess short and medium-term micro-finance impacts from the borrowers' point of view using repeated household surveys carried out in rural Bangladesh. Using nationally representative data, Khandker, Pitt and others show that poverty reduction among the borrowers due to micro-finance is 1.6 percentage points per year. Moreover, micro-finance programs have spillover effects on the non-borrowers-their poverty level goes down by 0.3 percentage point a year. A recent credible study by the Institute of Microfinance confirm these findings and shows the differential impact on poverty between those who use micro-credit for productive purposes and those households who use it for consumption needs.

Even without the income gains, the poor may still benefit from micro-credit services if it helps them withstand income and non-income shocks such as an economic disaster resulting from the sudden death of a productive family member, the loss of an economic asset or other natural disasters. Without some form of insurance (either public or private), the poor may not be able to smooth consumption during those disasters which may lead to sharp cut-backs in essential food and non-food expenditures. Several studies confirm that micro-credit programs help households partially insure against shocks so that they effectively play an important 'safety net' role. One carefully designed study by Jonathan Morduch finds that micro-credit borrowers are about 50 percent less prone to consumption fluctuation than their counterpart non-member poor households in Bangladesh.

Clearly, further innovations are required to strengthen this crucial risk-reduction role, and in general to offer flexible financial services catering to different types of poor households in particular for the extreme-poor. I think micro-finance institutions need to strengthen their micro-insurance type products so that they go beyond the traditional life insurance for the death of a borrower but also include health insurance and crop insurance.


The discussion on the impact of microcredit would be incomplete without referring to the broader package of interventions that are provided with it. MFIs in Bangladesh vary significantly in terms of their noncredit services though they typically include training, related business development services and social messages on education, health and civic rights. One published paper by McCernan finds that these noncredit interventions raise self-employment profits in rural Bangladesh by 125 percent while the combined impact of credit and noncredit interventions on self-employment profits is 175 percent.

The impact evaluation literature on micro-finance in Bangladesh also contains some cautionary notes. For example, it is clear that not all borrowers benefit equally as it depends on their local economic environment, their entrepreneurial ability and the extent their income sources are diversified. A few studies also show that micro-credit does little to change gender inequities by limiting female control over loans. However, on balance there is more evidence suggesting that micro-credit does influence gender relations positively. Most published papers show that access to micro-credit leads to women taking a greater role in household decision making, having a greater access to financial, economic and social resources and having greater mobility in Bangladesh.

Having spent some time on the impact of micro-finance in Bangladesh let me say something on the regulatory framework. Bangladesh has achieved scale in micro-credit in an unprecedented manner and one of the reasons it has managed to do so relates to the relatively light touch regulations that the industry faces. We are striving to maintain the right balance of ensuring that micro-finance institutions have the space to innovate while maintaining oversight of poor people's money. We have set up the Microcredit Regulatory Authority (MRA) to achieve this balance and we aim to strengthen its capacity to achieve these goals. However, the MRA also needs to focus and as the regulator of the overall financial system and as Chair of the MRA board, my priority is that the MRA focuses on regulating the large and medium MFIs first as problems with these MFIs could impact the whole system.

Another regulatory issue which we are dealing with now relates to mobile phone banking. We have allowed various initiatives and partnerships to take shape and we have observed how these are playing out. Now we have developed guidelines to ensure a level playing field for mobile phone banking which we are sure will be a key component of achieving our financial inclusion targets. It will be interesting to see, for example, how MFIs and banks licensed to do mobile phone banking might begin to interact and change the landscape of financial inclusion. For example, collecting loans repayments over the mobile phone or co-operating to deliver bank based deposit services. So broadly the main message I would like to leave behind today is that we remain committed to a regulatory environment which safeguards people's money while ensuring that micro-finance institutions have the flexibility to develop financial products to suit poor people's needs and ideally strengthen corporate governance arrangements in parallel.

A third issue is that in Bangladesh, as in many low income countries, there are serious gaps in understanding basic financial concepts and applying numeracy skills, such as the ability to calculate rates of return on investments, the interest rate on debt; an understanding of the benefits and risks associated with


particular financial decisions, including spending, borrowing and investing. The poor are sophisticated managers of their own money. But due to lack of basic knowledge of terminology and banking products, people have difficulty appreciating the features of new innovative products and services of banks and MFIs. This is why I am encouraging MFIs to promote financial literacy program using radio, TV and internet to address some of these knowledge gaps.

It is clear that micro-finance can protect households from shocks, contribute to changing societal norms about the role of women in society and lead to some households moving out of poverty. Overall, it has played its part in the impressive progress Bangladesh has made in poverty reduction over the past two decades. Moreover, recently MFIs are developing linkage programs with banks to provide agricultural credit, particularly on behalf of those banks that have insufficient outreach in rural areas. MFIs have also been participating in joint platforms with banks in delivering remittances at faster speed. All these have helped foster financial inclusion where a recent World Bank index shows, Bangladesh has done quite well. At the same time we need to be mindful that not everyone utilizes loans productively and there is a risk of falling into over-indebtedness. So, the role of micro-finance should be strengthened through further innovations which take into account these pitfalls. The potential of micro-finance can be best exploited by recognizing the lessons from careful impact evaluation studies, strengthening programs on the basis of this research and field experience, and by incorporating micro-finance programs into Bangladesh's overall poverty-reduction strategy. It is through carefully designed empirical work that the perception gaps on micro-finance will slowly be bridged and the debates will become less polarized in their opinions.


*Validation workshop on "Disaster Risk Reduction Products and Strategies for Microfinance Sector in Bangladesh" organized by Comprehensive Disaster Management Programme (CDMP II), Disaster Management and Relief Division, Ministry of Food and Disaster Management, 24 May, 2012.

Disaster Risk Reduction Products and Strategies for Microfinance Sector in Bangladesh*

The focus of this validation workshop is pertinent to today's world which is highly prone to natural disasters. Indeed, fast changing climate has further complicated disaster related vulnerabilities. A careful assessment of disaster risk reduction products and services is therefore of great importance to policymakers, program managers and the stakeholders not only in policy making but also in the formulation of an effective strategy for microfinance sector in the arena of managing disaster. I would therefore like to congratulate the Comprehensive Disaster Management Program for sponsoring this important initiative.

Bangladesh has achieved scale in microcredit in an unprecedented manner and one of the reasons it has managed to do so relates to the relatively light touch regulations that the industry faces. We are striving to achieve the balance of ensuring that microfinance institutions have the space to innovate while maintaining needed oversight of poor people's money. We have set up the MRA to achieve this balance and we aim to strengthen its capacity to achieve the goals. Another regulatory issue we are dealing with relates to mobile banking. We have allowed various initiatives and partnerships to take shape and we have observed how these are playing out. We have developed guidelines to ensure a level playing field for mobile banking which will be a key component of achieving financial inclusion targets. Microfinance industry as a whole will certainly be benefiting from fast expanding mobile banking as this will reduce the cost of delivery and recovery of small loans in addition to improving transparency. In fact, some MFIs have already started applying this innovative financial instrument and thus contributing towards deeper financial inclusion. So, broadly the first message is, we will remain committed to maintaining a stable macro environment and a desirable regulatory environment safeguarding people's money while ensuring that microfinance institutions have the flexibility to develop financial products to suit poor people's needs.

A related point is about the role of microfinance within the Bangladesh Bank's goal of fostering financial inclusion. Financial inclusion essentially aims to


provide flexible financial services - savings, insurance and credit - to those who currently do not have access to these services. The central bank is committed to advancing this agenda and as many of you know we have taken a number of initiatives to promote financial inclusion Including creation of Ten Taka account; promoting credit to sharecroppers in partnership with BRAC; ensuring at least half of the newly opened bank branches in the rural areas; licensing of mobile banking and the SME refinancing window. We recently documented these initiatives at a SAARC seminar on the role of central banks in financial inclusion and also highlighted the trade-offs that exist while promoting financial inclusion. Bangladesh holds the second position in South Asia in financial inclusion index, according to the latest World Bank report: the Global Findex.

Bangladesh is one of the most disaster prone countries in the world. Life and livelihood of microfinance sector are affected by disasters. Disaster, vulnerability, poverty and microfinance sector therefore have the synergy effects. Currently there is no acceptable standard product that could work as safeguard for microfinance sector during disaster. Besides, microfinance industry faces dilemma during disaster in the sense that neither MFIs can write-off loans nor can recover loans after disaster, rather faces severe challenges in loan recovery.

All development actors are directly or indirectly vulnerable to disasters. A disaster might damage the progress that has been achieved through lots of efforts, resources and initiatives. Therefore, all development actors, either in the government or non-government sectors, need to have an effective disaster risk reduction strategy which is mutually supportive. In this regard, MFIs need to frame an effective disaster risk reduction strategy in order to sustain their development efforts for themselves and their borrowers. A comprehensive pre-disaster planning of MFIs may significantly help reduce vulnerabilities through planned actions.

We have learned that initiative of formation of Disaster Management Fund already got momentum. PKSF has mobilized Taka 400 Crore and its partner organizations have mobilized generous amounts as well. Besides, several big, medium and small MFIs also created disaster management fund. But there are no unified principles and guidelines in managing this fund. A common fund can be mobilized through a network of apex organization, government, donors and respective organizations. Here, MRA may like to make a pro-active regulatory move as well.

Psychologically microfinance borrowers face traumatic experiences during disaster and the loan loss is even more traumatic for borrowers due to disruption of market mechanism. In such situation, initiatives are strongly needed to identify suitable disaster risk reduction products and services which would help MFIs mainstreaming disaster risk reduction strategies in Bangladesh.


*Seminar on 'Microcredit Operations in Bangladesh: An effective way in reducing poverty', held at Dhaka on 20 June 2012.

Microcredit Operations in Bangladesh: An Effective Way in Reducing Poverty*

Vision 2021 of present government depicts strong commitment in building up a happy, prosperous and developed Bangladesh. Reducing poverty to a minimum level is one of the goals of this vision 2021 including reduction of all kinds of discrimination and attaining a sustainable economic growth. For achieving this goal sectors like accelerated agricultural growth to ensure food security, comprehensive rural development, target based creation of employment and creation of strong social security boundary have been identified as mains strategies with a view to attaining overall development of the poor population employment and income generative various programs have been implemented successfully and here the role of micro-credit activities for self employment is crucial. Present Awami League led government has also formulated 'National Industrial Policy-2010' in which emphasis on small, medium and large industries have been laid down to accelerate the gradual development of micro (very small) industry.

Bangladesh has achieved unprecedented success in the sphere of micro-credit, one of the main reasons for this is its regulations. Micro- credit organizations of Bangladesh should provide new services side by side with discharging responsibilities of using money of the poor people by staying inside the proper rules and regulations. And for this reason the government has established Microcredit Authority (MRA) and has made it obligatory to take license of MRA for all Micro-Credit Organization (MFI). MRA established about four years ago to ensure transparency and accountability in the functions of MFIs conducting micro-credit functions in Bangladesh has developed into a smart regulatory organization gradually. However, MRA needs to be more powerful. On the other hand, big and medium kinds of problems of micro- credit organizations require regulators attention. Despite many disputes about impact of micro- credit on the macro economy at the national level, employment of marginal people have increased substantially through micro credit.

The history of micro-credit in Bangladesh spans for a period of four decades. It is admitted in the world that Bangladesh has introduced micro- credit. After liberation the concept which was introduced in the war ravaged Bangladesh


about micro-credit, as a continuity of it micro-credit system has reached this level today. The recipients of loan at present of the micro- credit organizations number 3 crores and amount of loan has exceeded 20000 crores. And on the other hand, the economy of Bangladesh has also been able to stand on a solid foundation today. Bangladesh has gone far ahead on the way of inclusive socio- economic progress; it has received the identity of a country of emerging developing economy world-wide. A giant transformation has taken place in the economy of the country. The dependency on agriculture has reduced; manufacturing industry and importance of service sector have increased. This well- regulated micro-credit is playing a big role in the sphere of elimination of poverty. Micro- credit ensures stability of the consumption of the rural poor. Outside government's initiatives, the NGO are playing significant role in many sectors, such as micro-credit, education, health, removal of poverty, tackling the natural disasters and so on. Therefore, the role of NGO is indeed praise-worthy. Education lies in the core of success attained in Bangladesh in the control of population. Not only theoretical education, as there is various social organizations, so the social education has also been expanded.

In this case, NGOs have been playing an important role with expanded activities of NGOs a kind of change has started to set in the villages. Rural economy has revived. The wages of the workers in the village have substantially been increased than before. As a result of increase in wages, a large segment of rural people are giving labour to the non agricultural sectors outside agriculture. The discussion on influence of micro-credit will remain incomplete if its substantial subsidiary and inter-mediatory role are left unmentioned. The micro-credit organizations of Bangladesh are marked by other services outside loan, though, these embrace taking various social steps involving education, health and citizenry rights and ordinarily measures of various trainings, development of concerned business sector. A research papers by McCernan suggests that these types of other services outside loan have increased the opportunity of self-employment in the rural areas of Bangladesh by 125 percent, where the joint influence of loan and other services outside loan on the opportunity of self- employment is 175 percent.

By the index of financial inclusion Bangladesh remains somewhat in a leading position, Bangladesh Bank has undertaken many creative steps to give support to attain inclusive economic growth and to the multifarious initiatives of the government to remove poverty alongside its conventional responsibilities. Side by side tillnow it has given emphasis on increasing flow of loan to the sectors which have received hitherto inadequate attention particularly to agriculture, SME and environmental friendly sector. The purpose of undertaking these kinds of actions is to expand the inclusion of backward population of society in the growth process, specially to increase access to loan service, to check the propensity of the rural people to come to cities through reduction of income differential, to increase qualitative degree as well as the quantitative degree of national growth through balanced development of the backward area, Bangladesh depends specially on agriculture for economic growth. But until now it was not possible to ensure adequate financial assistance to the agriculture. MFIs side by side with banks can assist in fulfilling this deficit by coming forward to provide loan to the farmers.


During 1980s the rapid increase of population including frequent natural disaster and low economic growth postulated that a large number of families of the country will be thrown into abject poverty. By proving this attitude erroneous the rate of poverty of Bangladesh has reduced remarkably. Four decades ago where more than 70 percent of the people were under poverty line, there at present the number of people living under poverty line has further declined to 31.5 percent. One of the main reasons of reduction of this rate of poverty is the comprehensive increase of micro-credit program in the country. Now the question is, how the micro-credit has contributed to the removal of poverty. The chief reasons behind the ever increasing economic growth of Bangladesh and reduction of poverty include low rate of population increase, developed human resources, high productivity of agriculture, improved infrastructure and ever increasing inflow of foreign remittance. Some published evidences reveal the fact where micro- credit is contributing and where it is not contributing. Two aspects have been observed in the evaluation of the poverty in the year 2008 by the World Bank. For instance-as compared to the year 2000 micro- credit essentially expanded more in the poor areas, because due to geographical causes relatively developed areas have come under the purview of it in the previous decade. On the other hand, in the rural Bangladesh, eradication of poverty has taken place mainly in the Upazillas where the number of recipients of micro- credit has increased quickly. Besides, there good effects of poverty elimination have been done more through distribution of micro- credit where the infrastructural developments by the government are more. On the other hand, where the infrastructural developments are comparatively less there the success of the work of poverty elimination has been achieved less.

The desired success of poverty elimination can be achieved through close relationship of micro- credit organizations with the government initiatives.

Two famous researches on the basis of household survey conducted in the rural areas of Bangladesh have evaluated elaborately the influence of short and long term micro-credit. Khandoker, Pitt and others have showed by using national information that the rate of poverty has reduced by 1.6 percent among the recipients of loan because of micro-credit. On the other hand, those who have not received micro-credit there is spillover effects on them and their rate of poverty has declined by 0.3 percent. The veracity of these information have been substantiated by a recent research conducted by micro-credit organization and it is found in it that those recipients of loan who have utilized their loans in productive activities and those who have utilized the loan to satisfy their demands of consumption- there is wide variance between these two types in the case of poverty elimination also. Some of the researches have also supported that if the micro-credit program assists in the managing of family or household then it plays an effective role through creation of significant security boundary. A research by Jonathan Morduch shows that those who have not taken micro credit- compared to them the recipients of micro-credit are less interested to consumption by about 50 percent.

There are some cautionary comments in a paper relating to evaluation of impact of micro-credit in Bangladesh. For example, it is clear that all recipients of loans are not benefited equally because it depends on their local economic environment, entrepreneurship ability and separate source of income. Some


researches support that micro-credit has played a very negligible role in the removal of disparity of man and woman. And there are many examples, through which it is realized that micro- credit has positively influenced the relationship of man and woman. Most of the papers suggest that the opportunity to receive micro- credit has helped the women to play a emboldened role in making decisions in various matters, Micro-credit has created opportunities for women to participate in socio- economic and other activities of the country.

Micro-credit organizations should strengthen their products and services further so that they may take other insurances (for example, health insurance) than stereotyped life insurance. We have taken various steps in the meanwhile to give structural shape to mobile banking and have approved of taking participatory steps with micro-credit organizations. A policy frame work has been formulated for conducting effectively mobile banking operations, which will make significant contribution in the achievement of goal of financial inclusion. Now the question is how the licensed micro-credit organizations play their part in changing the face of financial inclusion through providing mobile banking services by establishing linkage with banks. Poor people are efficient managers of their own money. But due to lack of basic knowledge about banking products make them face problems in getting new products and services introduced by bank and MFI. And for this reason micro- credit organizations should be encouraged to overcome this type of limitation of knowledge through financial education program (by using radio, television and internet). Micro-credit plays positive role to free the people from various repercussion and poverty and empower the women in the society. The microcredit has made significant contribution to the remarkable progress that Bangladesh has made in the mitigation of poverty during the last two decades. The banks those have scarcity of branches in the rural areas they are able to participate in agricultural loan distribution program through linkage with the micro- credit organizations approved by MRA.

As a result, more than 35 percent of agricultural loans of private/foreign banks are being distributed on the basis of partnership with MFI. Besides, to speed up distribution of remittance the micro-credit organizations have established partnership relationship with banks, since all cannot utilize the loan, there remains a risk of running into more loans. So, taking into consideration these problems the role of micro- credit is to be strengthened further by taking more innovative steps. At the same time, the possibility of micro-credit should be utilized through integration of necessary programs into overall poverty reduction strategy of Bangladesh.

Basically client is the mainstay of micro- credit. If the client can ameliorate his fate through micro-credit then general people will certainly support it. So, for improving client service modernization of microcredit organizations should be ensured. However, it is a little difficult process. When change in daily life has become normal and indispensable due to technological reasons it is thereby essential to retain the history and tradition of micro-credit. Micro-credit will take Bangladesh to a strong position and will uphold the prestige of Bangladesh in the outside world.


*Keynote address at a workshop on 'Regulation and Supervision of Microfinance Institutions (MFIs) in SAARC Region', organized by Nepal Rastra Bank on 20 March 2013.

Regulation and Supervision of Microfinance Institutions in SAARC Region*

I would like to start by thanking Nepal Rastra Bank, and specifically Governor Yuba Raj Khatiwada, for this invitation. I think this topic is a very important one and I am glad to be able to share a few thoughts on some cross-cutting principles which could be relevant to the regulation and supervision of MFIs across the SAARC region. The later sessions will have country by country experiences which is why I will discuss some broad cross-cutting themes, drawing of course on some of the experiences from Bangladesh where I am chair of the board of the Microcredit Regulatory Authority.

First, I want to start with the role of micro-finance within a central bank's, or governments, goal of fostering financial inclusion. Financial inclusion essentially aims to provide flexible financial services - savings, insurance and credit - to those who currently do not have access to these services. In Bangladesh for example, the Central Bank is committed to advancing this agenda and as many of you know, we have taken a number of initiatives to promote financial inclusion. These include the creation of more than 13 million Ten Taka accounts; promoting credit to sharecroppers in partnership with BRAC; the licensing of mobile phone banking, introducing school banking and the SME refinancing window. So in other words, regulating micro-finance which Bangladesh Bank is only involved indirectly is only one of many ways of affecting the broader goal of financial inclusion.

Having said that let me focus on the issue of microfinance regulation and supervision. Perhaps the most important role that the Central Bank, and more generally the government can play, is creating a conducive environment for MFI and private sector initiatives for financial inclusion to flourish. This conducive environment starts with providing the macro-economic fundamentals for financial inclusion. A critical ingredient in this is ensuring that the monetary policy instruments we have at our disposal contribute to robust economic growth while ensuring that inflation remains under control. Economic growth is essential to generate the demand for the enterprises developed by micro-finance and stable inflation is necessary to ensure that the progress poor people make from


world of macro-economic policy may seem miles away from that of micro-finance, they are in fact very inter-linked.

Another element which is essential for the overall conducive environment for micro-finance relates to regulatory oversight. Bangladesh has achieved scale in micro-credit in an unprecedented manner and one of the reasons it has managed to do so relates to the relatively light touch regulations that the industry faced during its growth years . We are striving to achieve the balance of ensuring that microfinance institutions have the space to innovate while maintaining oversight of poor people's money. We have set up the Micro-credit Regulatory Authority (MRA) to achieve this balance which is independent of the Central Bank except that I am the chair of its Board. We decided that Bangladesh Bank already had enough on its plate and that the large micro-finance sector deserved it its own regulator staffed by people who understand the sector. As the regulator of the overall financial system and as chair of the MRA board, my priority is that the MRA focuses on regulating the large and medium MFIs first as problems with these MFIs could impact the whole system. Yet small NGOs are also an important part of the micro-finance scene and often they offer innovative products. As part of MRA's regulatory role we have introduced an interest rate cap on MFIs set at a level which is sufficient for MFI's to break-even but not so high that they will make excess profits at the expense of the poor. MRA also has bans on forced deductions, caps on administrative charges and required loan grace periods as part of a package of restrictions in addition to interest rate caps.

Another equally important issue from an MFI point of view is the need to improve corporate governance. It is essential that board members meet 'fit and proper' criteria and that strong and independent boards scrutinize audited accounts and can take strategic decisions about the MFIs. Though not all MFIs need to be "socially motivated," all should meet standards for ethical behavior. Some incentives and regulatory benefits might even be available only to those MFIs that meet defined criteria for bringing socio-economic benefits to poor clients. To receive these benefits, socially-motivated MFIs should be required to meet defined standards, which could include using a recognized social-performance monitoring tool and matching executive compensation to the MFI's overall financial and social performance on a year-to-year basis.

Another regulatory issue which we are dealing with now relates to mobile phone banking. We have allowed various initiatives and partnerships to take shape and we have observed how these are playing out. Now we have developed guidelines to ensure a level playing field for mobile phone banking which we are sure will be a key component of achieving our financial inclusion targets. It will be interesting to see, for example, how MFIs and banks licensed to do mobile phone banking might begin to interact and change the landscape of financial inclusion. For example, collecting loans repayments over the mobile phone or cooperating to deliver bank based deposit services. While so far in Bangladesh we are regulating the formal financial sector's involvement in mobile phone banking, the next challenge for MRA could be when MFI's move into this space.

Another issue is that in Bangladesh, as in many low income countries, there are serious gaps in understanding basic financial concepts and applying numeracy skills, such as the ability to calculate rates of return on investments, the interest


rate on debt; an understanding of the benefits and risks associated with particular financial decisions, including spending, borrowing and investing. The poor are sophisticated managers of their own money. But due to lack of basic knowledge of terminology and banking products, people have difficulty appreciating the features of new innovative products and services of banks and MFIs. This is why both the Central Bank and MFIs need to promote financial literacy program using radio, TV and internet to address some of these knowledge gaps. We are starting such a program at Bangladesh Bank though I know some other Central Banks in the region have started this earlier and can share more details about their programs, and their cooperation with MFIs, later today.

I would also like to stress the importance of developing a micro-finance Credit Information Bureau. The size of the industry has grown so much that it is important to know credit histories and multiple borrowing issues before new loans are made. Moreover with the advent of mobile phone banking a microfinance CIB can truly revolutionize the industry like in other countries as loan officers can receive information about existing and potential clients on their mobile phone - in Bolivia for example if the client of one MFI goes and applies for another loan from a different MFI the CIB immediately sends that message to the mobile phone of the original loan officer. A microfinance CIB may take more time to develop than a CIB for the formal financial sector but it is definitely an investment worth making.

It is clear that microfinance can protect households from shocks, contribute to changing societal norms about the role of women in society and lead to some households moving out of poverty. Overall, it has played its part in the impressive progress South Asia has made in poverty reduction over the past two decades. Moreover, recently MFIs are developing linkage programs with banks to provide agricultural credit, particularly on behalf of those banks who have insufficient outreach in rural areas. MFIs have also been participating in joint platforms with banks in delivering remittances at faster speed. All these have helped foster financial inclusion. At the same time we need to be mindful that not everyone utilizes loans productively and there is a risk of falling into over-indebtedness. So, the role of microfinance should be strengthened through further innovations which take into account these pitfalls. Another area for improvement is that of micro-insurance, especially health related which for those at the bottom of the pyramid is often a key reason for poverty. There is hardly any meaningful insurance intervention for micro-finance clients. The Institute of Microfinance Bangladesh is currently conducting research on this issue and we hope this will yield insights into new program design. Our MRA hopes to provide the regulatory framework so that MFIs and healthcare providers can tie-up to help expand the micro-health insurance program after getting concrete recommendations from aforementioned research work. This regulatory framework will need to be worked out in consultation with the existing insurance regulator in Bangladesh which regulates mainstream insurance products.

The potential of microfinance can be best exploited by recognizing the lessons from careful impact evaluation studies, strengthening programs on the


basis of this research and field experience, and by incorporating micro-finance programs into a country's overall poverty-reduction strategy. It is through carefully designed empirical work that the perception gaps on micro-finance will slowly be bridged and the debates will become less polarized in their opinions.

So broadly the main message I would like to leave behind today is that there should be a regulatory environment which safeguards people's money while ensuring that micro-finance institutions have the flexibility to develop financial products to suit poor people's needs and ideally strengthen corporate governance arrangements in parallel.

Finally, as we look forward let me leave all of you with a somewhat philosophical question. How does microfinance continue to evolve and innovate, keep pace with the modern world, without losing the important roots of why it started and how? One answer I would be confident giving is that it begins and ends with the client. If clients continue to do well microfinance overall will prosper and there will be general public support for it. And for clients to do well, microfinance institutions will need to modernize and in the process there could be painful transitions. At the same time while change is both natural and inevitable given the way technology is altering our lives, we also need to retain the history and traditions of these great micro-finance institutions which have made South Asia a better place to be and have made us very proud overseas.


*Seminar on 'Micro, Small & Medium Enterprise (MSME)', jointly arranged by Bangladesh and India, 23 March 2013.

Micro, Small & Medium Enterprise*

Neighbors in close friendly relationship, both Bangladesh and India see MSME development as crucially important for hastening inclusive economic growth, and clearly there is ample scope for deepening mutually beneficial cooperation and support between MSME policymakers and stakeholders of the two countries. I heartily congratulate IBCCI for this initiative, and thank the Indian High Commission for its supportive role in organizing the event.

As Governor of Bangladesh Bank (BB) I feel especially enthused about all local, regional and global initiatives for MSME promotion, particularly because BB has remained proactively engaged in this area with its ongoing financial inclusion initiative. In the financial inclusion initiative BB not only supports the widening of access to finance for MSMEs, but also tries to motivate and facilitate their convergence or agglomeration in clusters suitable for networking between themselves and for developing backward and forward value chain linkages with the input and output markets. Exchange of experiences and ideas in such networking clusters tend to help incubate innovation of more efficient output processes and business practices.

The value chain networking linkages between MSME clusters can stretch across national borders into the regional domain between friendly neighbors, and this is where I see the most promise of benefit from seminars like this one being held here today. In interactive discussions the participating policymakers and MSME stakeholders from Bangladesh and India will be able to get to know about each other's approaches and experiences, enabling them to identify possible areas of mutually beneficial cooperation.

I expect the discussions to help policy makers in identifying ways of improving their training, networking and innovation supporting initiatives, and the MSME stakeholders to identify backward and forward linkaging opportunities between MSME clusters/individual MSMEs in Bangladesh and India. In recent years there has been substantial progress in Bangladesh in buildup of bank-led BB supervised linkages between banks, MFIs, mobile telephony/smart card based IT platforms in reaching out to MSMEs with loans and other financial services. Policymaker participants from Bangladesh may find significant lessons in India's approaches in promotion of entrepreneurship and innovation in collaboration with universities and industries.

Let me conclude here, looking forward to further deepening of bilateral Bangladesh-India engagement in MSME promotion, with repetition of similar future seminar events in both countries.


Microfinance and Development*

Overlapping per se is not a bad thing. After all many of us borrow from different sources. However the risk is over-indebtedness and this is something that we have seen in the formal financial sector as well. In order to address this in the formal sector we set up the Credit Information Bureau (CIB) which is automated and highly functional in Bangladesh. I would like, therefore, to stress the importance of developing a micro-finance Credit Information Bureau. There has been a lot of talk about this for the last ten years here in Bangladesh but sadly little concrete action. I urge the industry to get together to make this happen as soon as possible, as it is even more urgent than before. The reason is that the size of the industry has grown so much that it is important to know credit histories and multiple borrowing issues before new loans are made. Moreover, with the advent of mobile phone banking a microfinance CIB can truly revolutionize the industry like in other countries as loan officers can receive information about existing and potential borrowers on their mobile phone. In Bolivia, for example if the borrowers of one MFI goes and applies for another loan from a different MFI the CIB immediately sends that message to the mobile phone of the original loan officer. Of course the CIB is not a magic bullet and won't solve all problems. In addition to this in the formal sector we have now developed the large loan monitoring software so that we can identify those individuals or groups who can potentially cause systemic problems if they are allowed to borrow excessively by individual banks. But these happen in a certain logical sequence and as such I encourage MRA and the industry in general to move quickly on the CIB front.

Since I mentioned MRA, let me say something on the regulatory framework. Bangladesh has achieved scale in micro-credit in an unprecedented manner and one of the reasons it has managed to do so relates to the relatively light touch regulations that the industry faces. We are striving to maintain the right balance of ensuring that microfinance institutions have the space to innovate while maintaining oversight of poor people's money. We have set up the Microcredit Regulatory Authority (MRA) to achieve this balance and we aim to strengthen its

*National Conference on Microfinance and Development Arranged by Institute of Microfinance August 25, 2013, PKSF Auditorium, Dhaka.


capacity to achieve these goals. However, the MRA also needs to focus and as the regulator of the overall financial system and as chair of the MRA board, my priority is that the MRA focuses on regulating the large and medium MFIs first as problems with these MFIs could impact the whole system. Indeed, our primary objective should be to avoid systemic risk in this industry.

A third issue is that in Bangladesh, as in many low income countries there are serious gaps in understanding basic financial concepts and applying basic numeracy skills, such as the ability to calculate rates of return on investments, the interest rate on debt, and basic arithmetic ability; an understanding of the benefits and risks associated with particular financial decisions, including spending, borrowing and investing. Due to lack of appropriate basic knowledge, people have difficulty in learning about new innovative products and services of banks and MFIs. Bangladesh Bank has a financial literacy program using radio, TV and internet to address some of these knowledge gaps. However, we need to work together on this and do consider how you can make it easier for your borrowers to understand exactly what products are being offered, what the interest rates are and what the advantage and disadvantages of the different financial products you offering are. This could also reduce the drop-out problem addressed in the paper.

It is clear from the research evidence that microfinance can protect households from shocks, contribute to changing societal norms about the role of women in society and lead to some households moving out of poverty. Overall, it has played its part in the impressive progress Bangladesh has made in poverty reduction over the past two decades. In fact, over the last few years there has been consistently reduction of poverty at an average rate of about 2% Plus besides improvement in other social indicators. Moreover, recently MFIs are developing linkage programs with banks to provide agricultural credit, particularly on behalf of those banks including the foreign banks that have insufficient outreach in rural areas. MFIs have also been participating in joint platforms with banks in delivering remittances at faster speed. All these have helped foster financial inclusion, for which Bangladesh is gradually emerging as a role model. At the same time we need to be mindful that not everyone utilizes loans productively and there is a risk of falling into overindebtedness. So, the role of microfinance should be strengthened through further innovations which take into account these pitfalls. Here as indicated by Professor Baqui Khalily we need to find some ways of introducing insurance scheme.The potential of microfinance can be best exploited by recognizing the lessons from studies such as these, strengthening programs on the basis of this research and field experience, and by incorporating micro-finance programs into Bangladesh's overall poverty-reduction strategy. It is through carefully designed empirical work that the perception gaps on micro-finance will slowly be bridged and the debates will become less polarized in their opinions.

Finally, as we look forward let me leave all of you with a somewhat philosophical question. How does microfinance continue to evolve and innovate, keep pace with the modern world, without losing the important roots of why it started and how? One answer, I would be confidently giving is that it begins and ends with the borrower. If borrowers continue to do well microfinance overall


will prosper and there will be general public support for it. And for borrowers to do well, microfinance institutions will need to modernize and in the process there could be painful transitions. At the same time while change is both natural and inevitable given the way technology is altering our lives, we also need to retain the history and traditions of these great micro-finance institutions which have naturally evolved and made Bangladesh a better place to be and have made us very proud both home and abroad. At the same time we are equally proud of the industry friendly regulatory body called MRA which has been immensely contributing towards maintaining desired stability of the industry.


*Are Microcredit Participants in Bangladesh Trapped in Poverty and Debt? Organized by InM 1 July 2013, PKSF Auditorium Agargaon, Dhaka.

Are Microcredit Participants in Bangladesh Trapped in Poverty and Debt?*

Let me start my comments with some context on how poverty has evolved since Bangladesh's independence. In the 1970s, three out of four Bangladeshis lived in poverty and the country was considered a test case for development. Rapid population growth, frequent natural disasters, and low economic growth throughout the 1980s suggested that a large number of households would remain trapped in chronic poverty.

Defying this outlook, Bangladesh began experiencing more sustained economic growth since the 1990s, which was accompanied by impressive poverty reduction. For example, in 1991-92, about 60 percent of the population was below the poverty line; and by 2005 poverty had gone down to 40 percent. In 2010 the number of people below the poverty line has gone down further to 31% and in the latest projection released by the World Bank last week, poverty in 2013 has gone down further to around 27-28%. In other words poverty has halved over the last twenty years in Bangladesh - something we should all be very proud of. What is also very reassuring is that the nationally representative survey conducted by InM last year also showed very similar trends and so we can be very sure of this progress.

So what has driven this reduction in poverty? Declining population growth rates, improved human capital, higher agricultural productivity, better infrastructure, and increased foreign remittance have been put forth as factors explaining Bangladesh's enhanced growth and declining poverty. But what was the contribution of microfinance to this impressive performance? It is impossible to put an exact number but this study confirms what we knew before. An earlier rigorous study by Professor Osmani showed that micro-finance contributes to income gains and asset build-up. Even without the income gains, the poor may still benefit from microcredit services if it helps them withstand income and non-income shocks such as an economic disaster resulting from the sudden death of a productive family member, the loss of an economic asset or other natural disasters.


Without some form of insurance the poor may not be able to smooth consumption during those disasters which may lead to sharp cut-backs in essential food and non-food expenditures. Several studies confirm that micro-credit programs help households partially insure against shocks so that they effectively play an important 'safety net' role. One carefully designed study by Morduch finds that microcredit borrowers are about 50 percent less prone to consumption fluctuation than their counterpart non-member poor households in Bangladesh. So microfinance can be used in conjunction with other government and NGO safety net programs to limit the vulnerability the poor face due to shocks.

The discussion on the impact of microcredit would be incomplete without referring to the broader package of interventions that are provided with it. MFIs in Bangladesh vary significantly in terms of their noncredit services though they typically include training, related business development services and social messages on education, health and civic rights. One published paper by McKernon finds that these noncredit interventions raise self-employment profits in rural Bangladesh by 125 percent while the combined impact of credit and noncredit interventions on self-employment profits is 175 percent. In addition most published papers show that access to microcredit leads to women taking a greater role in household decision making, greater access to financial, economic and social resources and having greater mobility in Bangladesh.

It is clear that microfinance can protect households from shocks, contribute to changing societal norms about the role of women in society and lead to some households moving out of poverty. Overall, it has played its part in the impressive progress Bangladesh has made in poverty reduction over the past two decades. But not everyone utilizes loans productively and there is a risk of falling into overindebtedness.

So, the role of microfinance should be strengthened through further innovations which take into account these pitfalls. Thus, the potential of microfinance can be best exploited by recognizing the lessons from careful impact evaluation studies, strengthening programs on the basis of this research and field experience, and by incorporating micro-finance programs into Bangladesh's overall poverty reduction strategy. I believe this study is a useful contribution to the debate on micro-finance especially since it takes a long term view with panel data over the past twenty years. It is through carefully designed empirical work that the perception gaps on micro-finance will slowly be bridged and the debates will become less polarized in their opinions.

Before ending let me put three issues on the table which are related to strengthening the micro-finance industry more broadly wearing my hat as the chair of MRA. Perhaps the most important role that the Central Bank, and more generally the government can play, is creating a conducive environment for MFI and private sector initiatives for financial inclusion to flourish. This conducive environment starts with providing the macro-economic fundamentals for financial inclusion. A critical ingredient in this is ensuring that the monetary policy instruments we have at our disposal contribute to robust economic growth while ensuring that inflation remains under control. Economic growth particularly the inclusive economic growth is essential to generate the demand for the


enterprises developed by micro-finance and stable inflation is necessary to ensure that the progress poor people make from having access to savings, insurance and loans is not eroded away. In Bangladesh we have succeeded in bringing inflation down from double digit levels to under 8%. Our financial sector reforms are in progress and while we have seen some recent increase in non-performing loans, partly due to moving to a new regime of loan classification, we expect that they will come down towards the end of this year. So overall my message is that whiles the world of macro-economic policy may seem miles away from that of micro-finance, they are in fact very inter-linked. This macro-micro interlinkage also deserves to be put in perspective while conducting a discussion an impact of micro finance on poverty reduction.

The second issue relates to the need to improve corporate governance in MFIs, just as in the banking industry overall. It is essential that board members meet 'fit and proper' criteria and that strong and independent boards scrutinize audited accounts and can take strategic decisions about the MFIs. Succession plans also need to be put into place as first generation founder leader hand over to the next generation. In future once MRA's capacity is further strengthened some incentives and regulatory benefits might even be available only to those MFIs that meet defined criteria for having strong corporate governance, management and ultimately socio-economic benefits to poor clients. To receive these benefits, socially-motivated MFIs could consider using a recognized social-performance monitoring tool and matching executive compensation to the MFI's overall financial and social performance on a year-to-year basis.

Let me briefly touch upon the Grameen Bank issue as it has been discussed a lot in the media. As many of you know Bangladesh Bank is obliged to carry out annual inspections of Grameen Bank. On the basis of these inspections Bangladesh Bank has not found anything that requires a major change in how Grameen Bank operates. Moreover, I should clarify that Bangladesh Bank has had nothing to do with the Grameen Bank commission.

Finally in Bangladesh, as in many low income countries, there are serious gaps in understanding basic financial concepts and applying numeracy skills, such as the ability to calculate rates of return on investments, the interest rate on debt; an understanding of the benefits and risks associated with particular financial decisions, including spending, borrowing and investing. This is why both the Central Bank and MFIs need to promote financial literacy program using radio, TV and internet to address some of these knowledge gaps. We have started such a program at Bangladesh Bank and hope MFIs can scale up these activities.

PART FIVECSR and Green Banking Issues


CSR Evening: Meeting Social Goals*

Corporate Social Responsibility or CSR is gaining fast global acceptance as a standard to assume environmentally sustainable and socially equitable business practices. The role of business worldwide and specifically in the developed economies has evolved from classical 'profit maximizing' approach to a 'socially responsible' approach, where business is not only responsible to its stockholders but also to all of its stakeholders in a broader inclusive sense.

With increased globalization, local businesses are being more integrated with the global economy than ever before. Hence the pressure is mounting on local businesses to converge on international standards of socially responsible business. As a member of the global economy, Bangladesh is also aware of the need to take positive initiative to establish an image of environmentally and socially responsible businesses.

CSR as a concept is being gradually interwoven into the psyche of local business. This is both internal and external. Those corporate houses are leading change; obviously trying to integrate CSR within their own management structure. CSR certainly means how responsive they are to their work, how environment friendly their offices are, how employment generating they are. However, the process is still slow and only in its infancy. In most of the cases, CSR practices are not particularly framed in the context of seeing to it that the money being given as corporate donations have been part of a sustaining community development effort.

The banking sector of Bangladesh has been actively participating in various social activities. However, these efforts were hardly recognized and labeled as CSR activities since most of the financial institutions have not integrated CSR in their routine operation; rather these were in the form of occasional charity or promotional activities.

Bangladesh Bank has taken initiatives in respect of formalizing CSR in the banking sector of Bangladesh and issued an elaborate directive to the banks and financial institutions on June 1, 2008 in this regard. It defined the strategic

*'CSR Evening: Meeting Social Goals' organized by Management and Resources Development Initiative (MRDI), 24 October, 2009.


objective for CSR engagement, provided some priority areas with a suggestion to foster CSR in their client businesses, and suggested a first time CSR program indicating some likely action plans. Bangladesh Bank has been monitoring CSR adoption and CSR performance of banks and financial institutions, as an additional dimension of their management performance.

Bangladesh Bank also had the opportunity to provide a sense of direction to the CSR agenda of the banking sector when it suggested that, banks would be considered as more compliant of Corporate Social Responsibility that are taking measures for rehabilitating agriculture, fisheries, livestock, and protecting environment, besides providing relief to the people affected in natural calamities like 'Sidr' and 'Aila'. The banking community has responded sensibly to the call for CSR and sustainable social development. We are trying hard in mainstreaming CSR in all of our financial institutions. In fact, some of our banks have responded so positively that they are often quoted as CSR brand leaders. We are also observing a gradual but qualitative change in the CSR action programs undertaken by banks. For example:

J Disaster relief and rehabilitation became the segment where the highest number of banks participated to help ease the sufferings of the affected people. In the current context, a desired move from the traditionally popular fields of education or health is needed.

J Several banks introduced micro-finance for the target groups, such as poor farmers, landless peasants, women entrepreneurs, rootless slum people, handicapped people, etc.

J More and more banks have taken long-term or renewable scholarship programs for under-privileged but meritorious students for the persuasion of their studies instead of providing one time recognition awards to good performers.

J Some banks choose to provide continued financial support for maintaining operating costs of health care organizations.

J We hope to compile all these initiatives under a single cover and provide you with a comparative picture.

J We want to integrate human stories in this compilation so that we can learn from each other success stories.

Without a 'governance framework', businesses may face substantial difficulties in finding and maintaining appropriate boundaries for their CSR interventions, and they may find themselves pressurised into activities that are beyond their core competence and represent a financial drain on business rather than a sensible CSR investment.

MRDI's initiative aiming at proper utilization of CSR funds by means of seeking commitment from the leaders of trade and industry to undertake target-oriented actions for sustainable social development is appreciable. MRDI has rightly pointed out that as an alternative development funds, CSR can contribute to poverty reduction and supplement government's efforts towards achieving the millennium development goals. Their emphasis on skill development is


particularly appreciable.

In a developing country like ours with modest resources, it is important that we deploy our resources most usefully, and hence, we should make an effort to have an overall 'national policy on CSR' that starts from building understanding of CSR incentives and pressure points and improving strategic interactions and alignment between public policy goals and the CSR-related activities of businesses.

Finally, may I remind all of our corporate friends and others present here that we need to be engaged in CSR activities for our self interest. We have to commit ourselves for an inclusive growth process which has not only an ethical dimension but also an element of self-interest. Let me therefore end this intervention by quoting a couple of lines from Geetanjali of Rabindranath Tagore:

Those you push down

They will pull you down.

So, let's move together to build a more advanced society.


CSR Priorities*

Corporate social responsibility is gaining fast global acceptance as a paradigm to imbed environmentally responsive and socially equitable business practices for sustaining development. It is an encouraging trend that CSR as a concept is being gradually interwoven into the psyche of local business. This is both internal and external. Those corporate houses who are leading change, obviously are also trying to integrate CSR within their own management structure. This, they think as good investment as well. This not only improves their good will but also expands clientele-base.

I'm much gratified to know that Prime Bank Ltd. has sponsored such a foundation to exert CorporateSocial Responsibility through ensuring basic needs, the education and healthcare in particular, for the underprivileged section of our society. This indicates that financial institutions are gradually moving intomainstream development beyond conventional relief and distress related activities while pursuing their CSR strategy. As you all know that Bangladesh Bank has already issued an elaborate directive defining the strategic objective for CSR engagement, and some priority areas with a suggestion to foster CSR in their client businesses, and it also suggested a first time CSR program indicating some likely action plans. Meanwhile, Bangladesh Bank has started monitoring the additional dimension of banks and financial institutions management performance which focuses on the status of the adoption of CSR.

One of our objectives is to streamline CSR in all financial institutions day by day. In fact, some of our banks have responded positively who may be rightly quoted as augmenting 'CSR brand leaders'.

However, we are also observing a gradual but qualitative change in the CSR action programs undertaken by banks. For example:

J A desired move to the fields of education or health in addition to conventional disaster relief and rehabilitation.

J Introducing micro finance for the target groups such as poor farmers,

*Brainstorming event of Prime Bank Foundation on CSR priorities, 6 December 2009.


landless peasants, women entrepreneurs, rootless slum people, handicapped people, etc. by several banks.

J Long-term or renewable scholarship programs for under-privileged but meritorious students for the persuasion of their studies instead of providing one time recognition awards to good performers.

J Providing financial support for maintaining operating costs of health care organizations.

We hope to compile all these initiatives under a single cover and want to integrate human stories in this compilation so that we can learn and materialize it from each other's success stories over time. Today's brainstorming session on prioritization of CSR organized by Prime Bank is indeed a timely move from this strategic interest of the central bank.

In a developing country like ours with modest resources, it is important that we deploy our resources most efficiently, and hence, we should make an effort to have an overall 'national policy on CSR' that starts from building understanding of CSR incentives and pressure points and improving strategic interactions and alignment between public policy goals and the CSR-related activities of businesses. We should prioritize those CSRs which will contribute to poverty reduction and will supplement government's efforts towards achieving the millennium development goals. The core imperative of the CSR strategy should be how to increase opportunities for the deprived and disadvantaged.

In recent years, CSR has become a vital part of a comprehensive approach to business success, particularly in light of recent scandals that have undermined trust in business leadership in the West. As global pressures continue to force companies to think deeply about their societal impact, the implementation of CSR will continue to grow as an issue of both global and national interest. This basic observation holds the key to creating an environment that is hospitable to change and improvement.

Finally, may I remind all of our corporate friends and others present here that we need to be engaged in CSR activities for our self interest. We have to commit ourselves for an inclusive growth process which has not only an ethical dimension but also an element of self-interest which covers the long term goal of sustainable development for all of us.


Prospects, Constraints and Solutions of Renewable Energy in Bangladesh*

This is universally accepted that the infrastructural development especially the development of power and energy sector is very important for a country's economic development. Considering this, the present government has given special priority on power and energy sector in their Vision-2021. In pursuit of this, the honorable Finance Minister has declared a Road Map for power and energy sector to decrease demand gap where, among other issues, renewable energy (solar, wind, biogas) based power generation is also planned to be raised to five and ten percent of total output respectively by years 2015 and 2020.

Although government has taken prompt and diverse initiatives and action plan on the development of power and energy sector, we need more time to harness the success of these initiatives. Besides, it is known to all that the price of diesel, the major source of energy, is very high. In this context, renewable energy can mitigate the demand of power and energy. Mentionable, at present in our neighboring country such as India and China a portion of the power demand is being met by renewable energy. In Bangladesh among renewable energies solar power, bio-gas, and wind power have great prospects. On the other hand, in the context of our geographical and social condition, the prospect of generating hydro-power is fainting. I think, among these sectors, the prospect of solar power in Bangladesh is better. Because, according to specialists' views, Bangladesh is situated between 20.30-26.38 degrees north latitudes and 88.04-92.44 degrees east which is an ideal location for solar energy utilization. Particularly coastal areas are suitable for using solar thermal and photo voltaic since these areas enjoy sunlight for a long time. Similarly, there is also a great prospect for producing biogas in Bangladesh. Consequently, it is possible to meet the energy needs of rural people for lighting and cooking purposes by using environment friendly renewable energy sources. And this renewable energy can play a vital role in socio-economic development and employment generation in the country.

Renewable energy technologies are still evolving, and with high initial costs despite tax breaks and other incentives are yet to attain cost competitiveness as commercial proposition. Other constraints are lack of public awareness regarding

*National dialogue on 'Prospects, Constraints and Solutions of Renewable Energy in Bangladesh', organized by BRES (Bangladesh Renewable Energy Society), 6 November 2010.


renewable energy technology, dearth of after-sale services, high price of raw materials etc. Life duration of renewable power panels is very long. So, I think this initiative of generating electricity through environment-friendly way will be cost effective in the long run although preliminary expense is some what more.

Bangladesh Bank has undertaken multi-dimensional steps for increasing adequate and noticeable credit flow in Agriculture, SME and environment-friendly projects with a view to bringing the majority people of the country within the fold of financial service or to speed up financial inclusion. For this reason, to redress electricity and gas deficiency through using environment friendly alternative energy and for keeping natural stability and preserving public health, a new refinance scheme worth Tk.200 (two hundred) crore has been introduced by Bangladesh Bank to finance Solar Power, Bio-Gas and ETP at a lower interest rate. At present banks have been refinanced from this fund at only 5% interest rate. Banks have, so far, drawn Tk. 1.50 crore under refinance scheme from this fund of Bangladesh Bank to make credit facility available to the clients for integrated cow rearing and bio-gas plant and they have themselves already disbursed almost Tk.11 crore. It has to be increased. Non-Bank Financial Institutions (NBFIs) also have access to this refinance facility. We have already enclosed necessary option into our guidelines if banks feel interested to recruit agent for expanding credit facility. A private bank has made arrangement to provide facility for irrigation through solar power in Borguna. I think it is an innovative and great initiative for Bangladesh.

We are not only giving directions to the scheduled banks rather we have established a solar panel with 20 kw picks production capacity on the roof of Bangladesh Bank. This initiative is a primary step as Corporate Social Responsibility in enabling Bangladesh Bank more environmentfriendly. We are going to issue a circular on 'Green Banking' very soon so that other banks mayundertake the same steps.

To facilitate the larger size local borrowing for power projects, recently Bangladesh Bank has temporarily waived single borrower exposure limits on bank lending to these projects. Further, a USD 50.00 million IDA supported credit line titled Investment Promotion and Financing Facility (IPFF) administered by Bangladesh Bank had co-financed with local lenders in term lending to seven small power projects. 178 MW power has already been added to the National Power Grid from these projects. The initial allocation, being utilized fully, the IPFF is being replenished with a larger (USD 257 million) new inclusion from IDA. There is an arrangement for providing creditfrom this fund to different infrastructural sectors including renewable energy.

A request will be submitted to the Chairman of National Board of Revenue very soon asking exemption/decrease of Duty, VAT etc. on various machinery parts (such as charge controller, inverter, solar pumps etc.) of solar power plant so that the respective entrepreneurs can provide solar power plant to the consumer at a lower cost.

It is clear from the above discussion that the central bank has initiated multi-dimensional activities for expansion and implementation of renewable energy beyond performing its traditional functions. We want to further strengthen this


activity. So, the entrepreneurs should come forward to undertake cost effective schemes for this purpose. Besides, necessary steps are to be taken to develop, disseminate, promote and extend the renewable energy technology to the rural people to meet their energy needs for lighting and cooking purposes by using sustainable and inexhaustible environment friendly renewable energy sources. In this job both government and non-government sectors have to come forward. Furthermore, close monitoring from high ups is to be adopted for coordination to expand renewable energy use.


Public Private Partnership and Corporate Social Responsibility for Social Development*

Corporate social responsibility or CSR is mainly about the awareness of and actions in support of environmentally sustainable societal development. CSR activities should target at integrating economic, environmental and social aspects.

The current simple CSR practices of financial and non-financial businesses in Bangladesh are limited essentially to passive charitable giveaways; proactive engagement in design and implementation of the action programs could have substantially strengthened and expanded the impact of their CSR budgets. CSR programs of businesses can bridge the market failures and market gaps that limit the access of the poor to the services necessary for their wellbeing. Bangladesh Bank takes the pride that the banks and FIs are looking into these matters with a keen interest.

The main objective of CSR initiatives of banks and FIs are financial inclusion of the large socially disadvantaged rural and urban population segments; and generate new employment, output and income.

BB is motivating banks to expand lending to the under-served sectors both as business case and CSR obligation; expecting to lead to more broad-based inclusive growth, and therefore reduce poverty.

BB has requested banks to participate in CSR activities which came into effect from June, 2008. BB has indicated some priority areas in the field of CSR like Self-employment and SME credits designed to create productive new on-farm/off-farm employment; Financing of biomass processing plants, solar panels, waste recycling plants, Effluent Treatment Plants (ETPs); Credit programs for diversified production of crops, oilseeds, spices, vegetables, fruits etc.; Mobile phone based/MFI supported programs for prompt delivery of remittances; card based/ mobile phone based delivery of financial services; Financing programs to promote domestic tourism and markets in cultural products/events.

Bangladesh Bank has, of course, started guiding the banking sector to become more inclusive (e.g. via enhanced agricultural and SME lending) and

*Seminar on 'Public Private Partnership and Corporate Social Responsibility for Social Development' organized by CSR Centre, International Organization for Migration, 1 February 2011.


energy, bio-gas, effluent treatment plant etc). We have declared an agricultural credit policy. We will soon introduce green banking policy as well.

Bangladesh Bank has also been encouraging more inclusive remittance payment system and women-entrepreneur-friendly investment using PPP approach. It has already implemented a number of smaller PPP projects on electricity production. Interesting lessons have been learnt from these experimentations, some of which are worth replicating.

To be on a just and stable base, our growth efforts must spread benefits across all social groups and regions, and not worsen inequality further by neglecting the indigent. CSR programs of businesses can go a long way in reducing deprivation and widening the access of rural and urban poor to basic social and financial services necessary for healthy, enlightened and productive life. CSR programs should initiate steps for measuring and tracking the ecological footprints of the business activities, aiming over the medium term at what has come to be known as carbon neutrality.

Infrastructure development, especially power and energy, ports, communication, supply of drinking water and waste management, education and health is given highest priority nationwide and a huge investment is required to achieve this target. The government alone cannot provide such a huge amount of resources. As we know PPPs operate at the boundary of the public and private sectors, being neither nationalized nor privatized assets and services. PPPs represent best possible alternative way in which governments may deliver some public services.

In this regard Bangladesh Bank has been implementing the Investment Promotion & Financing Facility Project (IPFF) on behalf of Ministry of Finance with the financial assistance of the International Development Association (IDA). IPFF is a project, which came into existence in the year 2006, in which Bangladesh Bank is the executing agency, created mainly for lending to infrastructure projects in the private sector.

CSR programs and actions go beyond mandatory compliances into voluntary engagements to promote equitable, sustainable development. Besides the self-evident ethical case, a strong business case for CSR (as investment in a strategic asset or distinctive capability, rather than an expense) is also getting clearer with developing practice; seen as benefiting a business by:

- building reputation, brand value, customer loyalty, employee motivation and retention; mitigating risks in own operations and in assessing suppliers and clients;

- cutting down wastes (of energy, raw materials etc.), driving up efficiency;

- getting tax waiver on socially and environmentally responsible business lines new markets for products and services, in gaining the communities/social groups benefited by the CSR actions.

Historically, the banking sector of Bangladesh has been amply participating in various social activities especially, in the areas of education, health, sports, benevolent activities like donations to different charitable organizations, to poor


people and religious institutions, city beautification and patronizing art & culture, etc.

CSR expenditures of banks have far largely been in the form of passive grants and donations. Banks were particularly responsive to emergency support needs of population groups affected in natural and man-made disasters. Apart from one-off grants and giveaways, some banks have engagements in longer term continuing support commitments, in areas of education and healthcare. Besides the passive engagements by way of grants/donations banks are now getting actively engaged in socially responsible business operations, by way of increased lending to under-served economic sectors like agriculture and SMEs, towards fuller financial inclusion and faster poverty eradication. For example:

- Pond re-excavation for fresh drinking water in the Sundarban area by Al-Arafah Bank Ltd.

- Improved low-fuel consuming oven in the Sundarban area by MIDASO

- Livelihood Program for poor women in Jessore by The City Bank Ltd.

- Distribution of Solar Lanterns (lamp) and education materials to two thousand (2,000) students in the Char area of Nilphamari and Sirajgonj district by South East Bank Ltd.

- Tk.24 crore donations to "Muktijuddho Jadughar" by the banking community.

- Monthly subsistence allowance to widower of Martyred freedom fighters in Jamalpur district by Trust Bank Ltd.

- Scholarship to the children of poor freedom fighters and among the poor students of remote and underdeveloped area (Char, Haor, Coastal area) of the country.

All these initiatives are reflected in the report 'Review of CSR Initiatives by Banks 2008 & 2009' of BB. BB is also thinking about encouraging BIBM to give an annual award for the notable humane banks. This will initiate positive competition for more humane banking among banks.

Furthermore, CSR initiatives of banks are now reflected in the 'Management' component of the CAMELS Rating of the banks.

However, proactive initiatives of helping arrest environmental degradation, like adoption of more energy efficient, and harmful emission/effluence reducing internal practices and processes have been largely absent in the CSR initiatives, even of branches of foreign banks with such practices in their home offices.

In addition, banks are yet to adopt practices of prior stakeholder consultations (an important element indicated in BB's guidance circular) in drawing up their CSR programs and to adopt separate reporting of their CSR activities in comprehensive formats such as the GRI.

Environmental degradation, climate change, energy shortages, poverty and regional disparity have all become daily challenges we are facing today and the


solution cannot be reached by any one company or country. Fortunately, many countries increasingly come together to find solutions to these problems that will benefit the whole globe; thus, a new collaborative platform composed of creative thinking and innovation has been developing. Asian banks are at present underestimating the impact of these calamities and a sense of urgency towards playing a meaningful role in tackling them.

The China Banking Association has begun to push CSR initiatives forward within the sector by drafting and publishing China Banking Sector's CSR guidelines.

In order to achieve the goal of sustainable banking, banks in China such as commercial banks adopted proactive strategies for reducing internal operation risks from environmental issues thereby realizing long-term profitability by external financing of environment friendly products and services.

The Reserve Bank of India has asked the banks to pay special attention towards integration of social and environmental concerns in their business operations.

RBI has asked the banks to start non-financial reporting, which will be used to audit their initiatives towards the CSR. Such a reporting will cover the work done by the banks towards the social, economic and environmental betterment of society.

Banks/financial institutions (PFIs) in our country have the opportunity to participate PPP projects under IPFF, government-approved private infrastructure development projects. Power generation, transmission and distribution and services, port development (sea, river and land), environmental, industrial and solid waste management, highways and expressways including flyovers, water supply and distribution sewerage and drainage and industrial estates and park development etc. are the eligible sectors to be financed under IPFF.

To facilitate these larger size local borrowing for power projects, recently Bangladesh Bank has temporarily waived single borrower exposure limits on bank lending to these projects. Further, a USD 50.00 million IDA supported credit line under IPFF administered by Bangladesh Bank had co-financed with local lenders in term lending to seven small power projects. 178 MW power has already been added to the National Power Grid from these projects. The initial allocation, being utilized fully, the IPFF is being replenished with a larger (USD 257 million) new inclusion from IDA. There is an arrangement for providing credit from this fund to different infrastructural sectors including renewable energy.

Within this framework, the banks/FIs engaged in the PPP Programme seek to promote various aspects of CSR, e.g. by implementing higher labor standards, environmental standards, and sound business ethics. They have formulated environment policies in accordance with guidelines issued by the Government, in terms of which the environmental impacts are considered at the time of


conducting Credit and Lending Risks Analysis. Some banks have also introduced guidelines requiring assessment of environmental and social impacts of the projects to ensure that operations of the projects would be eco-friendly.

More specifically, some banks/FIs while engaged in the PPP Programme support and respect the protection of human rights within their sphere of influence, discourage the use of child labor by the client, eliminate discrimination in respect of employment and occupation within their own organization, support any precautionary approach by the client to environmental challenges, and undertake initiatives to promote greater environmental responsibility.

It turns into a question among the partaker and beneficiaries on the subject of whether a CSR spending is labeled as expenditure or an investment. A good number of banks in our country have created separate Foundation/Trusts as non-profitable, non-governmental organization, solely devoted to the cause of charity, social welfare and other benevolent activities towards the promotion of CSR objectives. These banks are providing a certain percentage of the pre-tax profit/net profit each year towards their CSR activities. They are making continuous efforts to look beyond short-term quantitative gains, and to concentrate on issues that make the institutions socially responsible and have given all out efforts towards sustainable balanced growth. In particular, they are supporting human resources development by providing scholarship for higher studies for the economically challenged meritorious students. BB has given a direction for this as well.

As an encouragement for CSR activity, business houses are already enjoying 10% tax exemption on their actual CSR expenditure in 22 sectors. In addition, poor farmers in our country are now receiving tax exemption on income from deposit balance up to Tk. 1 lac on their '10 Taka Farmer Account'.

Their intention to take part in the sustainable development of the country by reaching out with financial services to the less well-off population segments of the community in order to speed up financial inclusion of the large socially disadvantaged rural and urban population segments; drawing them in with appropriate financial service packages and with financing programs innovatively designed to generate new employment, output and income turn their CSR spending into a long-term investment.

Civil Society should view CSR within four areas of responsibility: economic, legal, ethical, and philanthropic. The first two are obligatory areas for corporations to be compliant with, while ethical responsibility is expected of them. The last responsibility - philanthropic - is desired of corporations by civil society.

Many banks and financial institutions in Bangladesh already have significant outlays of charitable expenditures such as community investments by way of donations to initiatives of Civil Society Organizations (CSOs), NGOs and


institutions involved in health, education and culture; for social and environmental improvement including nutrition, health and education in the disadvantaged population segments.

Bangladesh Bank is encouraging forging of linkages between the formal financial sector with MFIs, FIs, CSOs, NGOs and the Government. National authorities may encourage and promote tie-ups of larger non-financial businesses with micro and SMEs with many direct and indirect incentives.

PPP and CSR can walk hand in hand in the future with proper cooperation among different organization. Innovative ideas from both Govt. organizations and private can set these two segments in a strong platform to widen up a big scope for social development to bloom up.


Environmental Risk Management Guidelines*

This is indeed my great pleasure to see financial sector leaders assembled here to recognize the importance of environmental risk management practices in financial sector governance and sustainability. Bangladesh Bank is firmly committed to contribute significantly as a regulatory authority to the Climate Change agenda in Bangladesh.

The financial and economic development of Bangladesh is inextricably linked to our vulnerability to environmental degradation. An increasing awareness of the need to foster sustainable development and the impact of a deteriorating climate on financial institutions and business enterprises have driven the creation of Environmental Risk Management Guideline encouraging banks and FIs to adopt risk management practices to safeguard against these inevitable environmental concerns.

As a nation, Bangladesh is taking bold steps to mitigate the effects of environmental degradation and ensure a path of sustainable economic development.

Bangladesh Bank formed a core group to work on Environmental Risk Management Guideline for Financial Institutions in association with IFC and circulated to banks on January 30 and FIs (NBFIs) on April 06, 2011. The ERM Guidelines were developed in a consultative manner with several rounds of discussions with financial sector stakeholders, association leaders and technical experts.

This approach allowed for the creation of a truly democratic document which will ensure smooth adoption by all concerned institutions and in turn, foster a sustainable banking system. The guidelines aim to streamline solutions for managing the impact of environmental risks in the financial sector.

This regulatory document will function in parallel with the central bank's drive to create accountable project financing through adoption of a Corporate Social Responsibility framework by the financial sector, as both aspects are

*Launching event for Environmental Risk Management Guidelines of Bangladesh Bank, 17 April 2011.


critical to the functioning of a sustainable banking system in Bangladesh. While the objective of CSR is to realize and prioritize the financial sector's imprint on the environment and society in which it operates, the ERM Guideline aims to internalize the risk.

A detailed guidelines on Green Banking has been issued on February 27, 2011 where banks have been advised to give more emphasis to help environment by eliminating paper waste, saving gas and carbon emission, reducing printing costs and postage expenses. During this program, we have tried to be green. Paper use has been minimized through copies of the ERM Guidelines being disseminated through USB drives instead of printed paper. This is yet another effort at creating a digital Bangladesh that actively contributes to sustainability and efficient use of resources. I am quite confident that the banks shall comply with the instructions stipulated in the detailed guidelines on Environmental Risk Management (ERM) in consideration of a part of the Green Banking Policy. Bank shall incorporate Environmental and Climate Change Risk as part of the existing credit risk methodology prescribed to assess a prospective borrower.

Co-operation amongst the financial sector is of paramount importance while implementing the recommendations within the ERM guidelines. Bangladesh Bank encourages building dedicated, in-house capacity within FIs to assess environmental risks in financing. That is why the guideline has been developed in consultation with banks and the private sector. This is also why the guidelines include country and sector-specific guidance on assessing portfolio risk.

FIs must be proactive. In addition to identifying and understanding the risks in financing in the Bangladeshi business climate banks should be actively considering investment opportunities in energy efficiency and renewable energy projects. We request that the IFC continues to work in the space of Sustainable Energy Finance and advice banks on building internal resource and capacity to identify, appraise and close Sustainable Energy Finance deals.

I would like to thank IFC for their support and inspiration in initiating work on Climate Change with the Financial Sector. I would like to thank the BB core group along with IFC and all concerned groups, experts and individuals who contributed to preparing ERM guidelines. I would like to thank IFC and concerned BB officials for their effort in organizing such an essential and timely event.

With this, I will close, thanking the participants who have joined this event and leave you with a message to take climate change and environmental consideration as a priority in your activities. Let me conclude with an insightful quote of Tagore: 'Civilization is the product of people's knowledge and nature's gift.'

So, let us utilize our knowledge and enterprises to sustain the nature and preserve the civilization.


Environmental Risk Management Guidelines for Banks and Financial Institutions*

It is my great pleasure to see the financial sector leaders assembled here to recognize the significance of environmental risk management practices to financial sector governance and sustainability in Bangladesh. Economic development of Bangladesh is critically linked to our vulnerability to environmental degradation. The urgency to foster sustainable and inclusive economic development while taking into account the adverse impact of climate change has driven the creation of Environmental Risk Management guideline encouraging banks and financial institutions in Bangladesh to adopt risk management practices in safeguarding environmental concerns.

It is high time for Bangladesh to take bold steps against environmental degradation and also to ensure the path of sustainable economic growth. In this regard, a traditional credit appraisal is not enough to protect a financing project from loan loss unless credit risks are linked with environmental risks. The need to identify environment associated credit risks has long been apparent and ERM Guidelines in this regard ensure incorporation of environmental risks by banks and financial institutions into their credit risk management structure.

A core group was formed in Bangladesh Bank for preparing this Environmental Risk Management Guideline for banks and financial institutions. The Guidelines were developed in a consultative manner with several rounds of discussions with financial sector stakeholders, association leaders and technical experts. A couple of months back, two core group members along with IFC consultant conducted intensive training workshops in Dhaka and other cities like Chittagong, Khulna, Bogra, Rajshahi and Sylhet covering around 300 officials from Bangladesh Bank, scheduled banks and financial institutions. You will be happy to know that in those workshops, paper use was minimized through dissemination of ERM Guidelines electronically instead of printed papers. This is yet another effort at creating a digital Bangladesh that actively contributing to sustainability and efficiency of resources. Bangladesh Bank has already taken a lead in promoting paperless green banking by giving a circular which promotes wide

*Programme on the 'Environmental Risk Management Guidelines for Banks and Financial Institutions' at the ADB Bangladesh Resident Mission, Dhaka on July 26, 2011.


scale automation. Bangladesh Bank does not accept any paper based communications from banks and financial institutions. They have to send their statements electronically to Bangladesh Bank. Bangladesh Bank does not accept any paper based applications from jobseekers. They are to apply electronically. No Paper based tenders are accepted in Bangladesh Bank. E-tendering is the accepted mode. No cheques travel to Bangladesh Bank from different banks. Bangladesh Automated Clearing House (BACH) only clears the images of the checks. Electronic fund transfer networks now facilitate corporates to pay the salary of their employees electronically without issuing checks. The automated Credit Information Bureau (CIB) in BB now clears electronic applications of bank's client's credit history in seconds which used to take weeks. No paper transaction is involved here. The recently introduced mobile banking system will reach every nook and corner of the country to enhance the drive for financial inclusion of BB. Add to this the Enterprise Resource Planning (ERP) introduced by BB which is encouraging paperless accounting, planning, budgeting and payments within BB and also the government in a transparent way of national switch soon to be introduced will further enhance e-commerce, yet another drive for electronic payment.

The structure of the guidelines provides the minimum that needs to be in place and are intended offer a common platform from which individual banks and financial institutions can launch their own environmental risk assessment framework capturing more accurate and developed image of the associated risks. Bangladesh Bank looks forward to guiding the financial sector in implementing these guidelines and hopes to herald a renewed commitment to environmental sustainability across the financial sector. Moving forward, banks are expected to tailor their own frameworks which are best suited to identifying, controlling, reporting and monitoring environmental risks pertinent to their portfolios.

Environmental Conservation Act 1995 and Environmental Conservation Rules 1997 contain provisions regarding conservation of environment, improvement of standards and control of environmental pollution from various sources; chief among them is the Environmental Clearance Certificate from the Director General of the Department of Environment (DOE). ERM is built on the existing regulation for environmental protection focusing on planning and implementing policies and procedures to mitigate environmental risks in financing for banks and NBFIs.

Basel II Capital Accords identify environmental risk as a facilitating element of credit risks that financial institutions should address in meeting capital requirements. Choices have to be made in terms of the number and quality of risk that banks choose to underwrite given practical considerations.

ERM guideline is truly a democratic document ensuring smooth adoption by all concerned institutions and in turn, fostering a sustainable banking system in Bangladesh. This regulatory document will function in parallel with the central bank's drive to create accountable project financing through adoption of Corporate Social Responsibility framework by the financial sector, as both aspects are critical to the functioning of a sustainable banking system. While the objective of CSR is to realize and prioritize the financial sector's imprint on the environment and society, the ERM Guideline aims to internalize the risk.


There is no denial the fact that a united effort is needed to cope up with environmental degradation. A detailed guideline on Green banking was issued in February 2011 where banks were advised to consider environmental issues in their business processes through eliminating paper waste, saving gas and carbon emission, reducing printing costs and postage expenses. In Bangladesh Bank, we have also started practicing video conference to communicate with our branch offices which significantly saves time, energy and cost. BB wants to set an example by practicing green banking as well. As already said, besides becoming automated and paperless, it is also going solar. It has put up the largest solar panel on its roof and is using LED bulbs to reduce energy consumption. It is also encouraging other banks to go green. From now on, no new rural branch can be opened without installing a solar panel. The other day a bank started solar energy driven ATM. BB has set up a Taka 2000 million (USD 30 million) renewable energy fund for banks and financial institutions investing in green energy including solar, bio-gas, effluent treatment plant etc. Already solar run irrigation pumps have been installed out of this refinance. Another bank has financed hundreds of bio-gas plants out of it in rural areas. Banks are also encouraged to provide CSR support for environmental responsive activities including solar panels to poor segments of the society living in off-grid, remote areas. We hope to support clean development initiatives including green brick production, carbon-trading, green building etc. out of this fund. Bangladesh Bank encourages building of dedicated, in-house capacity within FIs to assess environmental risks in financing. That is why the guideline has been developed in consultation with banks and the private sector.

Let me end with a quote from Tagore, a Nobel Laureate from Bengal 'People's knowledge and nature's gift together make civilization.' So, let's put our knowledge for nature's care.

Business Opportunities to Develop Energy Efficient Brick Kilns in Bangladesh*

Since Bangladesh is situated in the world's largest delta, the abundance of soil in the river delta topography provides the raw materials for bricks that have been the main building blocks for the country's civil construction. But brick manufacturing process is energy intensive and a main source of greenhouse gas which create serious environment hazards to our country. The existing brick kilns are the number one cause for fine particulate pollution in Dhaka and its total greenhouse gas (GHG) emission is estimated to be 9.8 million tons of carbon dioxide (CO2) equivalent per annum as of 2011**.

Global warming is an issue that calls for a global response. The rapid change in climate will be too great to allow many eco-systems to suitably adapt, since the change has direct impact on bio-diversity, agriculture, forestry, dry land, water resources and human health. Due to unusual weather pattern, rising greenhouse gas, declining air quality etc. society demands that businesses also take responsibility in safeguarding the planet. In addition, Bangladesh is one of the most climate change vulnerable countries. In line with global development and response to the environmental degradation, financial sector in Bangladesh should play an important role as one of the key stake-holders. Indeed, as a regulator of this sector, BB has already taken some smart moves.

For ensuring environmental friendly sustainable development BB already formulated and issued ''Environmental Risk Management Guidelines'' and "Policy Guidelines for Green Banking" for the banks and financial institutions. Paperless banking reduces carbon foot-print. Besides these, BB introduced a Refinance Scheme for Solar Energy, Bio-gas, and Effluent Treatment Plant (ETP) of Taka 200 Crore in August, 2009. And the area of this refinance scheme has been extended for establishment of Hybrid Hoffman Kiln (HHK)/equivalent technology plant in brick manufacturing industry with a view to reducing carbon emission. For using this kind of modern technology in the brick fields Taka 30 crore has been earmarked out of total fund of Taka 200 crore. Till date, we have already


*Workshop on 'Business Opportunities to Develop Energy Efficient Brick Kilns in Bangladesh', November 27, 2011.World Bank, 2011.Introducing Energy-efficient Clean Technologies in the Brick Sector of Bangladesh.

sanctioned 8.7 crore for 3 projects of which 2 Crore has already been disbursed for one project. Bangladesh Bank is providing fund currently at 5% interest rate and participating banks/financial institutions are charging maximum (5%+4% spread)=9% interest rate to the ultimate borrowers. In the proposed ADB Funds, this rate can be remained flexible if participating FIs go for partnership arrangement.

In Bangladesh, 92% of the 4,880 brickfields are highly polluting Fixed Chimney Kilns (FCKs) because of a combination of low capital cost requirement and high investment return. But these kinds of kiln use more coal/wooded fuel which emits more carbon. Also, this type of brick kiln is not energy efficient compared to other available technologies. Because of this negative environmental impact and high fuel costs from the large number of FCKs, Government issued directives on July 15, 2010 that (i) no FCK licenses be renewed after July15, 2012; (ii) environmental clearance be given to only those using more energy efficient zigzag kilns, Vertical Shaft Brick Kiln (VSBKs), and HHKs; and (iii) all FCKs will cease to exist from 15 July, 2013.

In Bangladesh, with the rapid economic and population growth, the construction sector will continue to expand at the current rate of 8%-9% per year (ibid). As the bricks constitute 44% of total construction materials, the demand for bricks will grow at least at about 5.6% per year. Since, we can't reduce the brick demand, we need to take actions to reduce carbon emission in the brick fields. In the above context and for smooth and easy compliances with the Government directives by the brick manufacturers, I appreciate the proposed ADB credit facility designed to provide designated funding to exclusively meet the demand from the FCK owners to upgrade their facilities to the improved zigzag kilns and finance more advanced VSBK, HHK and tunnel kiln development as a long term, permanent solution to modernize the brick sector and reduce Green House Gas (GHG) emission and fine particulate pollution.

ADB proposed two types of fund; Ordinary Capital Resources (OCR) fund of $30 million [25 years maturity with 5 years grace period, and 0.567% [6 months LIBOR) plus 40bps, 21 bps rebate for 2011, and a commitment charge of 15 bps] and Asian Develop Fund (ADF) of $20 million [ It is fixed-term, 32 years maturity including a grace period of 8 years, a 1.0% interest charge during the grace period and 1.5% during the amortization period, and equal amortization]. Now the LIBOR rate is 0.567% which may be considered as very low but it may increase in future. In addition, there is a commitment charge. So, this fund may not be as attractive as it appears on the face of it. Since Brick Kiln businessmen are already running their business and making profit, they will not be interested to take credit from banks unless they get it at a cheaper/concessional rate. Moreover, to attract new entrepreneurs in this sector, we need to offer lower rate. Conversion cost of a Zigzag Kiln from FCK is around Taka 35 lac. Since, the interest charge on OCR loan will be based on commercial rate, as an implementing agency BB also has to charge more to borrowers and the borrowers may be reluctant to avail this


*Bangladesh Brick Manufacturing Owners Association.

fund facility. As a result, it will be difficult to implement the Government directives. Thus, my suggestion is to increase the amount of the ADF loan covering both upgradation cost from FCKs to Zigzag Kilns and cost for financing VSBK, advanced HHKs and tunnel kiln.

In addition, in the ADB's proposed fund, the credit facility drawdown period is 24 months from the date of loan effectiveness. Since the demand from brick manufacturers will be less at the initial stage, the drawdown period may be extended to 36 months.

You know that many developing countries like China, India and Brazil are getting financial benefits through carbon trading. Bangladesh being developing country has immense opportunities to earn credits through carbon trading. Bangladesh has the possibility to earn USD 70.00 million every year by trading carbon in Global Carbon Credit Market for USD15.20 per tons of carbon dioxide (Certified Emissions Reduction). But due to lack of awareness, we could not attain desired level of benefits from this Clean Development Mechanism (CDM). We are hopeful that presently some institutions (IIDFC, Grameen Shakti, etc) are coming forward to utilize these opportunities. In the meantime, IIDFC already signed Memorandum of Understanding (MoU) with Denmark and got register with WB and UN Agency for carbon emission reduction trading.

The proposed fund of ADB may be considered as cheaper credit window that can help us to introduce energy efficient and environmental friendly technology in brick manufacturing sector by reducing GHG emission which can be traded in the Global Carbon Credit Market and thus, we can earn foreign currencies. BB will provide necessary support to such initiatives within its regulatory framework and the renewable energy fund which has been specifically created to promote Green Banking.



Making Sense of CSR: Connecting to Disability in Development*

We are in the month of International Day of People with Disability. Recently we have celebrated its 20th anniversary whose theme was 'Together for a better world for all: Including person with disabilities in development.' The theme is very appropriate from the development aspect in the sense that without the inclusion of all population segments of the society, particularly the disadvantaged and disabled, the hard-earned social and economic development is not sustainable. That is, we need to ensure an inclusive growth process that offers equal advancement opportunities to all population segments of the society. Realizing this, Bangladesh Bank has been campaigning on financial inclusion that promotes inclusive growth and offers financial services at the doorstep of all people of the country.

Let me now shed light on a few recent statistics on disability. According to the UN, around 15 percent of the world's population is disabled. A recent WHO report reveals that, around 9.0 percent of total populations in Bangladesh are disabled and only 11 percent of them have access to education. These statistics provide enough rationale for us to think deeply about the welfare of the people with disability so as to ensure an inclusive economic and social growth. In FY 2011-12 national budget, around Taka 1.0 billion has been allocated for providing financial assistance to 2.86 lakhs poor people with disability. Besides, the government has taken a good number of initiatives for the disabled including setting up of schools, vocational training and rehabilitation centres, scholarships for poor disabled students, training workshops and so forth. Nevertheless, this is not enough to meet the need of around 13.0 million disabled people of the country and therefore requires active engagement of the private sector which we call the corporate social responsibility (CSR). CSR is gaining fast global acceptance as a standard of socially equitable business practices. The role of business worldwide has evolved from classical 'profit maximizing' approach to a 'socially responsible' approach, where business is not only responsible to its stockholders but also to all of its stakeholders in a broader inclusive sense.

Let me now briefly discuss how the banking sector in Bangladesh is engaged in various social businesses. Immediately after assuming position as the BB

*Workshop on 'Making sense of CSR: Connecting to Disability in Development', organized by Centre for Disability in Development, 12 December 2011.


Governor, I have taken strong initiatives of mainstreaming CSR into corporate goals and objectives. Responding to this, CSR activities of banks deepened and broadened substantially. In 2010, CSR expenditure of banks totaled Taka 2.32 billion; four fold larger than in 2009. Highest expenditure was in the health sector followed by disaster relief and education. Health sector expenditure comprised financial contributions to hospitals, clinics and other facilities run by external organizations. Besides, some banks are running their own non-profit hospitals and diagnostics establishments.

To ease financial services to the disabled, Bangladesh Bank (BB) has set up separate counter at the cash department of its all branch offices. Besides, BB has advised all scheduled banks in Bangladesh to nominate an officer as the key focal person for providing financial services to the disabled. BB's agricultural credit program attaches special priorities to the disabled in distribution of agricultural credit. Banks are also helping mentally and physically disabled people of the society through theirs various CSR programs. For example, Dutch-Bangla Bank (DBBL) awarded scholarships to 5 physically disabled students who passed SSC examination in 2009. The scholarship covers financial assistance for their full academic periods. Besides, DBBL arranged free surgical operation for children and adolescents with club-feet and plastic surgery operation camp under its Smile-Brighter Programme. Another bank, the Standard Bank is serving people by setting up a temporary eye treatment project and also donated cheques to 20 war wounded Freedom Fighters. HSBC has been providing scholarships to 30 blind students over the past 3 years; the number has increased to 50 in 2011. BRAC Bank is providing financial aids for the treatment and education of hearing impaired poor people of the society. BRAC Bank is also supporting the leading school of Autistic Children for building awareness about Autism. Besides, BRAC Bank has provided educational materials to around 300 underprivileged children with multiple disabilities.

So, these are the few examples of how the banking industry in Bangladesh has been contributing to enhance the welfare of people living with disabilities. I can assure you that over the coming years banks will deepen and broaden their activities towards this population segment of the society.


NOBODOY for Renewable Energy*

We know that the adequate and reliable supply of energy is essential to sustain economic growth and facilitate both domestic and foreign investment. In this regard, renewable energy, particularly bio-gas and solar power, can play significant role in enhancing the level of income and living standards of the rural people in Bangladesh. Even if the government takes prompt and diversified initiatives and work plans towards enhancing energy sector, it will take time to get visible success from that. You are also aware of the diesel price hike. In this scenario, renewable energy can be an important participant in addressing the demand for electricity and fuel. At present in our neighboring countries such as, India and China a significant portion of the power demand is being met by renewable energy. Among the renewable energy sources, solar power, bio-gas, wind power, so on being the most potentials.

To redress electricity and gas deficiency through using environment-friendly alternative energy sources and for maintaining natural stability and preserving public health, a new refinance scheme of Taka 200 (two hundred) crore has been introduced by Bangladesh Bank to finance Solar power, Bio-gas and ETP at lower interest rate. From this fund, banks had received Taka 25 crore refinance and in the meantime, they disbursed around Tk.46 crore on their own which is not sufficient enough. For this reason, Non-Bank Financial Institutions have also been included into this refinance facility. Besides, we have enclosed necessary options into our guidelines which allow banks to engage agents in expansion of credit if they feel to do so.

Meanwhile, a private commercial bank (Trust Bank) has financed Bio-gas Plants in Manikganj, Moulvibazar and Gazipur. The bank has announced Gojaria of Sripur under Gazipur district as a 'Bio-gas Village.' The bank has also adopted a consolidated credit programs, by facilitating credit to the same family on solar power, poultry industry, fishery etc. under agro-based small and medium industry. It is an imitable example for others. Another bank (AB Bank) has started setting up solar panel in Sylhet for 2700 families in three phases. Recently, another private bank (Mutual Trust Bank) has made available solar powered irrigation facility to the farmers in Barguna. I believe these initiatives as innovative outstanding ones.

*Inauguration ceremony of financial product 'NOBODOY' for renewable energy organized by IFC and Eastern Bank Limited, 6 January 2012.


Eastern Bank Limited in collaboration with IFC has developed a creative financial product titled 'EBL Nobodoy' for generating electricity from poultry waste which is also a praiseworthy initiative. According to the statistics of IFC, at present 5 million people of Bangladesh are involved in poultry industry and it is the second largest source of rural employment. Poultry is the cheapest source of protein. In poultry sector, numbers of small and medium enterprises are around 120,000 to 130,000 and total investment is around USD 2 billion or Taka 160 billion. Clean energy potential from poultry waste is around 2,000 mwh/year.

I believe this product of EBL will help prevent environment pollution, maintaining human health and reducing disease outbreaks at poultry farms through adopting waste management method; on the other hand, will save power and diesel costs for running generator of the farm converting this waste into gas and electricity and additional income will be generated from the sales of slurry (key ingredients in organic fertilizer production). I have come to know that SEDF will support Eastern Bank in identification of poultry farms willing to go for Waste to Electricity projects, potentials of electricity generation, building capacity of service providers, assessing credit and technology risks and monitoring the implementation. As a result, this initiative of identifying the right entrepreneurs will play an important role in credit disbursement and recovery in future. EBL has already disbursed taka 4 million at 6 (six) bio-gas plants in Cox's Bazar and cheques of Taka 1.8 million and 24 thousands will be handed over to two poultry farms today.

Bangladesh Bank has another refinance scheme to establish processing industries of agricultural goods including bio-gas and electricity generation from rice-husk, poultry and cowdung, and production of edible oil from rice-brand. This product of EBL is mainly being introduced to expedite finance these kinds of agro-based industries. At this, rural entrepreneurs will be benefitted more from this product.

I hope that innovative entrepreneurs will come forward to the green finance activities of EBL and these programs will play a vital role in expansion and implementation of renewable energy campaign through bio-pesticide, bio-gas and power generating.


Climate Change and Banking Sector of Bangladesh*

Climate change and global warming has emerged as one of most discussed issues all over the world and it is of no less importance to the emerging economies like Bangladesh as well. Bangladesh is one of the most climate change vulnerable countries. We don't have any other option but to adopt and adapt a system that would play an effective role in coping with the varying environmental scenario. The system we are talking about is Green Banking.

In recently held Durban Climate Conference 2011, governments agreed to adopt a universal legal agreement on climate change by 2015. The governments came up with the following key decisions: (i) Green Climate Fund to be made available to developing countries by 2012, (ii) Adaptive capacities of the poorest and most vulnerable countries to be strengthened; (iii) Technology Mechanism to become fully operational by 2012. (iv)Accepting web-based registration of developing country mitigation actions seeking financial support.

Green Bank is an ethical bank, a socially responsible bank and a sustainable bank. Green banking has been identified as one of the major drivers of environment friendly sustainable economic growth in Bangladesh. This system is therefore to provide innovative green products and to support activities those are not hazardous to the environment. Green financing through due diligence under Environmental Risk Management (ERM) Guidelines is not for squeezing investment, rather it is for sustainable finance with an improved quality in banks' assets. Green financing under green banking would make great contribution towards transition to a resource-efficient and low carbon industry i.e. green industry and green economy in general.

The seminar is about identifying meaningful and appropriate policies, strategies and actions taken by the banking sector for combating adverse effects of climate change. The keynote paper discusses climate strategies of different global banks and examines existing climate change related activities by banks and other stakeholders in Bangladesh.

Bangladesh is a low carbon emitting country even among the developing countries; however, it is likely to be one of the worst sufferers of Global Warming.

*Seminar on 'Climate Change and Banking Sector of Bangladesh', organized by Bangladesh Institute of Bank Management (BIBM), 8 February 2012.


We have experienced that climate change has already enhanced the frequency and intensity of floods, droughts and cyclones in Bangladesh, and would have negative impact on water resources, land, crop agriculture and food security, fisheries and livestock, forestry and bio-diversity, and human health as well.

Climate change has not only brought business challenges for banks but has also offered opportunities. In connection with climate change related risks, the major risk to banks is credit risk. Banks also face operational and market risks. As one of the major stakeholders, banks can play a significant role in handling these risks. For this, banks will require a well-structured and transparent policy framework as well as long-term strategy.

In Bangladesh, environmental regulations impose obligations to the producers to comply with environmental standards. To address climate change vulnerabilities, Bangladesh developed National Adaptation Program of Action and Climate Change Strategy and Action Plan. To finance climate change adaptation measures from its own revenue income, government has developed a 'Climate Change Trust Fund'. Government has a Renewable Energy Policy in order to generate environment-friendly power from renewable energy sources. Clearance from the DOE is one of the major requirements for obtaining finance from commercial banks. However, we are yet to receive optimum results of all these provisions.

Kyoto Protocol allows both developed and developing countries to benefit through Clean Development Mechanism (CDM) process. However, in Bangladesh, general awareness and initiatives are relatively less with regard to CDM. A number of developing countries like China and India have taken a lot of initiatives and received benefits out of CDM, but Bangladesh could achieve little. Banking sector of Bangladesh may avail opportunities through financing CDM projects. In this connection, some NBFIs like IIDFC and IDCOL have undertaken initiatives with support and co-operation of donor agencies. The success of these projects will not only have a positive impact on the environment of Bangladesh but also will encourage development of other potential CDM projects in various sectors like bricks, power, and renewable energy.

Taking into account the adverse effects of climate change, BB issued a number of circulars/guidelines on environmental, online banking and CSR issues that are directly or indirectly linked to climate change. Particularly, the recently issued circular on 'Policy Guidelines for Green Banking' is a prudent step towards development of Green Banking practices in the banking sector Bangladesh. As per the guideline, commercial banks will have to adopt a comprehensive green banking policy to make banking practices more responsible to social and environmental issues. BB has also taken initiatives for rehabilitation of cyclone and other natural disaster affected people time to time.

Energy efficiency has received significant attention of BB in recent years. Banks have been advised to finance solar energy, bio-gas plant, ETP and Hybrid Hoffman Kiln (HHK) in brick field under refinance programs. BB introduced Taka 2.0 billion refinance line in FY 10 against bank loans for investments in solar energy, bio-gas plants and ETPs. A year back, BB switched over to solar-powered lighting by setting up a 20 kilowatt solar panel as a move towards encouraging


green energy in Bangladesh.

It is encouraging that some banks have financed reasonably good amount in solar, bio-gas, HHK and ETP projects in recent years. Some commercial banks have availed refinance facilities of BB. Others should respond positively in utilizing this low cost funding support. Few banks have specially designed project for the vulnerable areas affected by climate change. Dutch-Bangla has financed the first Compost Plant under CDM. Eastern Bank Limited in collaboration with IFC has developed a creative financial product called "EBL Nobodoy" for generating electricity from poultry waste which will help prevent environment pollution.

A few commercial banks are engaged in in-house environment management and are contributing towards environment friendly finance through their Green Energy Loans. However banks have a lot more scope to contribute and should make adequate investment in generating renewable energy. Banks should take initiative to set absolute GHG emission reduction targets from operations, energy use and business travel. Banks should also be engaged in financing CDM projects. For this, awareness of development and advisory services by banks in the process of development of CDM projects will be crucial. Banks should also take steps to form Climate Risk Fund to finance the economic activities of the flood, cyclone and drought-prone areas. I strongly believe that a co-operative effort of banks and other stakeholders will contribute remarkably in coping with climate challenges in coming years.


CSR for Banks and Financial Institutions*

It is very heartening to see the BAB, ABB and CSR Center jointly holding this discussion session on CSR initiatives in banks and financial institutions in Bangladesh, probably the first such event attended by both owners and senior managements of banks and financial institutions since issuance of BB's CSR guidance circular in 2008.

CSR entails voluntary observance of non-binding 'soft law' social and environmental obligations, beyond compliance compulsions with binding laws and regulations. The 'ISO-26000' published by the International Standards Organization codifies a set of common guidance on concepts, definitions and evaluation methods for the Social Responsibility obligations of organizational entities. Uniform CSR reporting formats developed by the Global Reporting Initiative (GRI), a forum of Civil Society Organizations, are in use by large globally active businesses in developed countries.

Awareness of social and environmental concerns among broad masses of population is heightening rapidly with sustained campaigns of civil society lobbies in both developed and developing countries, rendering CSR observance increasingly important for business success in winning over new customer bases, and even in holding on to the existing ones.

BB's 2008 CSR guidance circular aimed at positioning our banks and financial institutions as pioneers in ingraining and internalizing CSR in corporate goals and objectives, becoming role models for their borrower non-financial businesses to emulate. BB's supervisory CAMELS ratings of banks include their CSR performance rankings among the rating criteria used, rewarding CSR high performers with recognition and competitive edge attendant with better CAMELS ratings. The government also provides for some tax breaks as incentives supporting CSR initiatives in several sectors.

Response of our banks to BB's CSR guidance circular has thus far been very encouraging. Reported direct expenditure of banks on CSR initiatives have grown

*Discussion session on 'CSR for Banks and Financial Institutions' organized by CSR Centre in collaboration with Bangladesh Association of Banks (BAB) and Association of Bankers, Bangladesh (ABB), 19 April 2012.


tenfold in 2010 compared to 2007; banks have also engaged enthusiastically and robustly in the BB sponsored financial inclusion campaign to reach out to the unserved and underserved population segments and economic sectors. They are channeling increasing credit flows to micro and small scale farm and off-farm productive pursuits of people of small means, as also to environmentally beneficial projects like renewable energy generation, effluent treatment, adoption of energy efficient technology and so forth. Since 2010 banks have opened around ten million new bank accounts with nominal deposits as low as Taka ten for landless /small holder farmers, enabling them to receive government input subsidies directly without hassle. These accounts are coming into use by account holders also for making deposits and drawing bank loans; growing access to mobile phone banking is further facilitating these changes. Recently banks have started opening similar new accounts with nominal ten Taka deposits for the extreme poor, to enable their hassle-free direct receipt of government social security payments. Nearly three million of these accounts are already in operation. Reporting of CSR initiatives of banks in periodical returns to BB and in their public disclosures is steadily gaining in comprehensiveness and depth, with newer dimensions like environmental impact assessment in project financing decisions, and gender issues in workforce composition and internal working environment.

There are lots more still to do, however. Prior stakeholder consultation practices in drawing up CSR programs of banks are yet to take firm root. Comprehensive energy audits of internal processes and practices to measure the environmental footprint of a bank's operations are needed to enable precise planning for eliminating or minimizing the environmentally injurious impacts. Collective initiatives of banks can facilitate and hasten cost effective acquisition of the necessary technical know-how, there is scope for drawing upon expertise available in correspondent banks abroad pursuing well established and advanced CSR observance practices. In fleshing out the current rather sketchy CSR reporting practices of our banks into globally comparable well rounded reporting formats, they can usefully look at the reporting approaches of their correspondent banks in developed countries. Our banks can join hands in collective initiatives taking up larger scale, higher impact CSR initiatives not affordable by individual banks. Most of our non-bank financial institutions are yet to join the mainstream of CSR initiatives; they can begin with CSR engagements of their own, or join hands with banks in collective efforts.

Finally, banks can encourage their valued client businesses to expand or initiate CSR engagements, offering them helping hand with know-how and incentives, perhaps by way of favored customer treatment and feasible rebates on interest and banking charges/ fees on banking services.

I see today's discussion session on CSR as the beginning of a continuing brainstorming process on the subject in our financial sector, steadily deepening its engagement in the country's efforts of hastening poverty eradication with inclusive, environmentally sustainable economic and social development opening up fair advancement opportunities for all. BB will remain in readiness to extend supporting and guiding hand for CSR initiatives of our financial sector.


Sustainable Energy Financing:

Bangladesh Perspective*

It is indeed my great pleasure to see financial sector leaders assembled here to recognize the importance of sustainable energy finance (SEF) in Bangladesh and witness the launch of EBL Green Credit product. Bangladesh Bank is firmly committed to contribute as a regulatory authority to the SEF agenda in Bangladesh.

We are aware that global climate change and energy crisis is the biggest environmental challenges we are facing today. Compared to say, China, Bangladesh has improved her Human Development Index (HDI) between 1995 to 2005 with lower level of per capita domestic material consumption implying that Bangladesh's growth process is greener and more inclusive. Growth process of Bangladesh is qualitatively better than neighboring country e.g. India as reflected in her GINI index. Recently GINI Index in Bangladesh has either remained stable or declined. Poverty has not only literally halved over last two decades but also absolute number of poor has reduced.

The key to sustainable development is to ensure broad-based inclusive economic growth, with promotion of natural resources; preservation of regenerating capacity of ecological system; avoidance of environmental risks on future generations. Of course, our environment is still paying heavily for our enhanced growth rate, but not to the extent of other emerging countries. Moreover, we have taken some pro-active policy moves from the banking regulatory perspectives. Surely, banking is the sector that can play an intermediary role between economic development and environmental protection and lead from the front towards a sustainable future of Bangladesh.

In view of the above context, Bangladesh Bank has issued a detailed Environmental Risk Management guideline for banks and financial institutions in January 2011. This has encouraged banks and financial institutions in Bangladesh to adopt risk management practices in safeguarding environmental concerns. Bangladesh Bank (BB) has intervened timely and advised banks to facilitate their clients with utmost care in opening Letter of Credit (L/C) for installation of Effluent Treatment Plant (ETP) in the industrial units, finance in Solar Energy, Bio-gas and ETP etc. Banks have also been advised to comply with the guidelines on

*Launching of EBL Green Credit held on 10 June 2012.


Corporate Social Responsibility (CSR) where banks have been asked to concentrate on linking CSR at their highest corporate level for ingraining environmentally and socially responsible practices and engaging with borrowers in scrutiny of the environmental and social impacts. BB has provided indicative policy guidelines on Green Banking to all scheduled banks in February 2011.

As we look at the budget for FY 2012-13, we certainly feel how deeply the government of Bangladesh is committed to the agenda of Climate Change. Bangladesh has made substantial contribution towards establishing 'Green Climate Fund' and extending 'Second Commitment Period of Kyoto Protocol'. 'Bangladesh Climate Change Strategy and Action Plan, 2009' has been drawn out to tackle the challenges of climate change. 'Climate Change Trust Act, 2010' has already been enacted. Moreover, 'Bangladesh Climate Change Trust Fund (BCCTF)' has been created with our own resources. A total of Tk. 2,100 crore has been allocated for 'Bangladesh Climate Change Trust Fund (BCCTF)' over the last three years. Tk. 400 crore has been proposed to this fund for the next fiscal year. Besides, another fund titled 'Bangladesh Climate Change Resilience Fund (BCCRF)' has been created with an amount of USD 113.5 million with financial support from different development partners. Transmission of early warning of disasters through cell phone network has begun in cyclone-prone Cox's Bazar and flood-prone districts. In order to reduce the level of air and industrial pollution, 11 full-time 'Air Quality Monitoring Centres' have been established to measure the level of air pollution. The development of waste disposal management in 64 city corporations and municipalities across the country is underway with the financial support from Bangladesh Climate Change Trust Fund. A programme has been undertaken to increase the use of green fertilizers instead of chemical fertilizers. Meanwhile, Effluent Treatment Plants (ETP) has been installed in 280 industries. Zero percent (0%) tariff facility instead of existing 1% for the import of necessary equipments for installation of ETP in the export oriented industries has been proposed in the FY 2012 - 2013.

I will certainly say that neither a bank nor a financial institution in the world has as much regulatory support and guidance as a scheduled bank or financial institution of Bangladesh Bank is enjoying. I would strongly advice all the banks and financial institutions to take the full advantage of benefits from the refinance facility for renewable energy and capacity building for sustainable finance, an integral part of Green Banking activities that Bangladesh Bank is extending.

Let me now congratulate EBL to pioneer the first commercial Sustainable Energy Loan product in Bangladesh. Meanwhile I came to know that, EBL Green Credit is actually the Sustainable Energy Finance (SEF) product which includes three areas (i) Energy Efficiency (EF) (ii) Renewable Energy (RE) and Cleaner Production (CP). This SEF product will provide an avenue to harness the opportunities brought by the increasing requirement for clean energy investments, Investments in sustainable energy projects having low risks and short payback periods and above all creation of a "green" and socially/environmentally responsible image of the enterprise. The loan product is a timely initiative and milestone in banking industry in Bangladesh. I also congratulate EBL to take the lead in this market and show the world that financial sector of Bangladesh is many steps ahead in facing challenge of climate change


and energy crisis. This is indeed a strategic move by EBL, particularly at a time when we are all preparing ourselves to project green initiatives at the Rio+20 Summit.

I would like to thank financial institutions to accept the challenge of making a sustainable Bangladesh. I again appreciate and congratulate EBL for their bold SEF initiative and commit full support to the market. Special appreciation to IFC for their work in various capacities with Bangladesh Bank and financial sector to encourage SEF market in Bangladesh

FIs must be proactive! In particular, they should take full advantage of accessing the refinance facility available at the central bank under the umbrella of Renewable Energy Fund. In addition to identifying and understanding the risks in financing in the Bangladeshi business climate, banks should actively consider investment opportunities in energy efficiency and renewable energy projects. I am happy to see today, IFC in association with EBL is continuing to work together in the space of Sustainable Energy Finance. I would advise all the banks and financial institutions on building internal resource and capacity to identify, appraise and close Sustainable Energy Finance deals. Green Credit for Sustainable or Green Financing under Green Banking Activities can make great contribution to the transition to resource-efficient and low carbon industries i.e. green industry and green economy in general.

I would like to close here, thanking the participants who have joined this event and leave you with a message to take climate change and environmental consideration as a prior commitment in all your activities.

Green Banking and Sustainable Development: the Case of Bangladesh*

The theme of this seminar 'Green Banking: An Opportunity for Bangladesh to Accelerate Sustainability' is truly interesting and the issue itself is sure to draw attention amongst all the stakeholders.

The development strategies of Bangladesh Government, as laid down in the Perspective Plan and the Sixth Five Year Plan, clearly spell out the commitment of pursuing sustainable growth. The country's vulnerability to floods, cyclones and to the threat of inundation of large coastal areas from global warming driven sea level rise makes sustainability a prime development concern.

Over the past four decades since liberation, national income of Bangladesh has increased more than eighteen-fold, while the population has increased a little over two-fold. Real GDP growth averaged at around 6.0 percent annually over the last 10 years. Trade openness has integrated Bangladesh with global economy with trade/GDP ratio rising from around 20.0 percent during the1970s and 1980s to more than 60 percent in FY12. Poverty has come down to around 30 percent of the population now, from around 57.0 percent in the 1990s.

As you all aware that Bangladesh falls into the group of most climate change vulnerable countries in the world despite her insignificant share of global greenhouse gas (GHG) emission in comparison with other developing and developed countries. However, Bangladesh has made notable contribution towards establishing 'Green Climate Fund' alongside documenting the Renewable Energy Policy in 2008 & Environmental Preservation Act in 1997. Accordingly, the government of Bangladesh has decided to produce 5 percent of total power generation from renewable energy sources like solar energy, air & waste by 2015 & 10 percent by 2020 with the above Policy & Act. To protect our environment from industrial pollution a guideline is formulated under this act, which requires Effluent Treatment Plant mandatory for those Industries that emit liquid effluent. Around 60 percent people in Bangladesh are outside of the electricity facility while around 90 percent are outside of the natural gas network. Renewable energy, especially solar energy and biogas can provide a sustainable and

*Seminar on 'Green Banking and Sustainable Development: the Case of Bangladesh', 2 February 2013.


environment friendly solution to reduce the demand-supply gap of energy in the country.

BB has issued guidelines for environmental risk management and green banking in 2011 and is probably the only central bank, which has issued such an indicative guideline for green banking. The guidelines aim to ensure environment friendly business practices by banks and financial institutions, to incorporate environmental risks into Core Risk Management (CRM) and to promote sustainable financial and economic growth. Bangladesh Bank has also issued a common format to all the commercial banks to report green banking activities including the extent of carbon footprint in a structured way. Banks and financial institutions enthusiastically responded to this 'Green Banking' drive. Now they regularly submit a quarterly report to Bangladesh Bank on their performance of green banking activities.

BB formulated green banking policy guideline implemented in 3 phases from 2011 to 2013. By following these guidelines, banks will benefit in terms of improved CAMELS rating. Besides, BB will declare the names of the top 10 banks regarding their overall performance in green banking activities and will actively consider green banking activities of banks while according permission for opening new branch. BB has decided to accord permission for SME branch subject to installation of solar panel in place. Banks will also receive separate treatment in existing guidelines for Environmental Risks in computation of Adequate Capital by BB. To promote green energy, BB advised banks to facilitate clients to open L/Cs for installation of ETP in industrial units, to finance Solar Energy, Biogas and ETP projects, to comply with CSR guidelines for ingraining environmentally and socially responsible practices with the instructions stipulated in Green Banking Policy.

Besides these, BB introduced a Refinance Scheme (revolving) for Solar Energy, Biogas, and Effluent Treatment Plant (ETP) of Taka 200 Crore in August 2009. From this revolving fund, refinance facilities are allowed for banks/FIs against lending in the Solar Energy, Biogas Treatment Plant sectors on terms and conditions set forth in a BB's ACSPD Circular. By now, 27 banks & 1 Financial Institution have signed the participation agreement with BB to avail the refinance facility for Solar Energy, Biogas & Effluent Treatment Plant. As per another ACD Circular, refinances were allowed at limited scale up to Taka 300 million from this fund to establish Hybrid Hoffman Kiln (HHK)/equivalent technology in brick manufacturing industry with a view to reduce carbon & suspended particulate matter in the atmosphere.

Notwithstanding the insignificant amount relative to the overall country's demand, the achievements of green banking in the renewable energy sector are worth mentioning.

As of December 2012:

J An amount of Tk. 103.72 million has been disbursed under the refinance program of Solar Home System (SHS) to establish 3763 units SHS. These solar home systems are situated at off-grid areas of the country benefiting at least 3763 families with the production capacity is 164100 KW/day.



J An amount of Tk. 23.9 million disbursed for 8 solar energy driven irrigation pumps. No. of beneficiary farmers are 618 and bringing 920 bighas of land under cultivation with uninterrupted water flow enhancing the productivity and cropping intensity. Besides, an amount of Tk. 248.80 million disbursed for establishing Solar PV Module Assembly Plant. In the sub sector of Integrated Cow Rearing and Biogas Plant, an amount of Tk. 262.13 million has refinanced in 820 numbers of Integrated Cow Rearing and Biogas plant.

J An amount of Tk. 90.36 million disbursed for establishing 8 ETP with effluent treatment capacity of 18000 cubic meters per day contributing significantly in limiting environmental pollutions, while an amount of Tk. 124.47 million disbursed for establishing Hybrid Hoffman Kiln (HHK) technology in 3 brick manufacturing industries which reduces carbon emission in the brick manufacturing plants.

I would like to take this opportunity to share the green initiatives taken by BB. The central bank of Bangladesh is responding to climate change in a diverse ways. With a move towards encouraging green banking in Bangladesh, BB installed an 8-kilowatt solar power system on its rooftop in March 2010, which has been providing necessary energy supply for the executive floor along with emergency security lights in the BB premises. This is now being extended to cover more areas. A recent initiative has been taken to convert the 30-storied building of the bank into a 'Green Building' with the modern facilities of rain water harvesting, waste water recycling and motion sensor energy efficient bulbs supported by window based solar panels. Besides, BB is arranging an international conference on 'Green Banking' jointly with IFC in March 2013 in line with the outcome document of Rio+20 called 'The Future We Want," and COP meetings of the UNFCCC, especially COP 18 including the 'Kyoto Protocol' in combating various vulnerabilities due to climate change.

Bangladesh Bank has been working for last four years to establish a completely IT based banking system in the country. Various IT based initiatives of BB have been helping to move towards the paperless green banking. In view of ensuring low-carbon green development without compromising the imperative of faster economic growth and social development, IT infrastructure of the financial sector has undergone vast improvements in recent years. It has been facilitating countrywide automated online connectivity of banks with the BB for supervisory reporting, National Payments Switch and fully automated interbank clearing and settlement platforms for paper based and electronic fund transfers, and a credit information bureau accessible online by users.

Despite all these achievements, the prospect of achieving sustainable development is not free of challenges. Future challenges include formulation of sector specific environment polices, coordination among concerned authorities to build up a green economy, speeding up proper awareness and effective capacity building, application of quantitative approach for more justified ratings of banks. We envision Bangladesh as a mature advanced economy in 2050, with levels of human development and technological advancement sufficient to place her among leading Asian nations in terms of financial prosperity as well as social and environmental responsibility.


*'Business Opportunities in Green Financing', (Adaptation of Environment Friendly Projects), 4 February 2013.

Business Opportunities in Green Financing*

Bangladesh falls into the group of most climate change vulnerable countries in the world despite her insignificant share of global greenhouse gas (GHG) emission in comparison with other developing and developed countries.

However, Bangladesh has made notable contribution towards establishing 'Green Climate Fund' alongside documenting the Environment Preservation Act 1995, Enrinment Preservation Rules 1997, and Renewable Energy Policy 2008. Accordingly, the government of Bangladesh has decided to produce 5 percent of total power generation from renewable energy sources like solar energy, air & waste by 2015 & 10 percent by 2020 with the above Policy & Act. To protect our environment from industrial pollution a guideline is formulated under this act, which requires Effluent Treatment Plant mandatory for those Industries that emit liquid effluent. Around 60 percent people in Bangladesh are outside the electricity facility while around 90 percent are outside the natural gas network. Renewable energy, especially solar energy and biogas can provide a sustainable and environment friendly solution to reduce the demand-supply gap of energy in the country.

Bangladesh Bank (BB) as the central bank of the country is playing its due role through appropriate financing policy to encourage business investment along this line. BB has already formulated and issued ''Environmental Risk Management Guidelines'' and "Policy Guidelines for Green Banking" for the banks and financial institutions. Besides these, BB introduced a Refinance Scheme (revolving) for Solar Energy, Biogas, and Effluent Treatment Plant (ETP) of Taka 200 Crore in August 2009, which was approved by the Board of Directors of Bangladesh Bank on 07/06/2009. From this revolving fund, refinance facilities are allowed for banks/FIs against lending in the Solar Energy, Bio-gas and Effluent Treatment Plant sectors on terms and conditions set forth in BB's ACSPD Circular No.06, dated August 3, 2009. By now, 27 banks & 1 Financial Institution have signed the participation agreement with BB to avail the refinance facility for Solar Energy, Biogas & Effluent Treatment Plant.


As per ACD Circular No-9 dated 08/4/2010, refinances were allowed at limited scale up to Taka 300 million from this fund to establish Hybrid Hoffman Kiln (HHK) /equivalent technology in brick manufacturing industry with a view to reduce carbon & suspended particulate matter in the atmosphere. The modality of refinance facility under this scheme is shown in the following flow chart (Flow Chart-1). Flow Chart 1:

Funding Mechanisms of the refinance facility for Renewable Energy (RE) projects

a. Credit through commercial banks

b. Credit wholesaling through NGO linkage

MFI Linkage

Borrower to PFI for loanBorrower /

End user

Bank study the project& on the basis of BB circular

they finance the project

ParticipatoryFinancial Institution

(Banks/Fls)

Intermediary/agent

Payer for Refinance

BangladeshBank Fund

Project inspect by BB& allowed refinance on theBasis of Report & document

Refinancing at Bank rate (currently 5%)

Refinancing at Bank rate(currently 5%)

BangladeshBank

CommercialBanks

NGOLinkage

Investor

payback at 5% payback at 9% payback at 10%

Margin (9%-5%)=4% Margin (10%-9%)=1%

Bank rate +4% (Maximum)=9% 9%(maximum)+1%=10%

Bangladesh Bank Commercial Bank

Investor

payback at 9%Payback at 5%

Margin (9%-5%)=4%


Structure of Credit Facilities (Re-finance Scheme) to Renewable Energy Plants

A. Solar Panel

1. Credit facility:

For urban area: Minimum Taka 60,000 to maximum Taka 1,75,000.

For rural area: Minimum Taka 10,000 to maximum Taka 70,000 for individual usage and maximum Taka 1,75,000 for commercial usage.

2. Debt- Equity Ratio:

Upon bank-customer relationship

3. Capacity of solar panel:

For urban area: Minimum 170 Watt to maximum 520 Watt

For rural area: From 10-130 watt for individual usage and up to 520 watt for commercial usage.

4. Eligibility:

Institution/family can get the loan jointly or individually.

5. Interest rate for borrower:

At 9 percent, if the bank finances a borrower directly [bank rate (currently 5%) + maximum 4%].

If the bank finances through credit wholesaling through MFI linkage, the rate would be 10 percent [bank rate (currently 5%) + maximum 5%].

6. Re-payment period for the borrower:

The loan with interest will be repayable within 3 years from the date of first disbursement; interest is calculated on quarterly basis.

7. Re-payment period for re-financing:

Principal amount with interest is payable on a quarterly basis within not more than 3 years from the date of receiving the re-finance.

8. Procedure: Solar Home System (SHS):

J Apply for financing to banks/MFIs.

J Banks/MFIs examine the borrower's application and , if found creditworthy, approve the loan amount & Install the Solar Home System.

J In case of direct lending banks would submit refinance claim on a quarterly basis. In case of MFI linkage, banks would submit the refinance claim along with MFI statement, where detail information of borrower (name, address, loan amount, system price, loan tenure, etc) are mentioned.


J After receiving refinance claim from banks, BB examines the documents & inspects the project.

J The claimed amount is credited to respective banks account if the provided documents & inspection report abides the rule.

9. Achievement:

In rural areas of Bangladesh, only 40 percent of population has access of electricity. The people of the off Grid area can avail this low interest fund to establish Solar Home System (SHS) through PFIs.

J As of December 2012, an amount of Tk. 103.72 million disbursed under this refinance program to banks to establish 3763 units of SHS.

J These solar home systems are situated at off-grid areas of the country. By establishing 3763 SHS at least 3763 families are getting benefit and the production capacity is 164100 kw/day.

B. Solar Irrigation Pump Station

1. Policy for Solar Irrigation Pump Station

J Banks are requested to finance in this sector through ACFID Circular no: 01/2012.

J Loan Limit is not fixed for this sector.

J The refinance amount with interest is repayable within maximum 10 years with 6 months grace period from the date of the first disbursement.

J Refinance facility provided to bank on case to case basis.

J A solar irrigation pump generally costs 3.80 million Taka with generating capacity of 7.6 KW/hour.

2. How a Borrower can avail loan for Solar Irrigation Pump Station (SIPS)

J Farmers of the off grid area create a co-operative society with a view to establish solar irrigation pump station for irrigation purpose.

J Farmers' Co-operative Society exchange their views with MFIs & banks.

J After tri-party meeting, a formal proposal is to be submitted to bank by MFIs on behalf of farmers' co-operative society to establish SIPS.

J Banks examine the MFI application and approve, if found creditworthy, the loan amount & Install the solar irrigation pump station through vendor.

J After establishment of SIPS, the bank claims the financed amount to BB for refinance.

J After receiving refinance claim from bank, BB examines the documents & inspects the project.


J If the provided document & inspection reports are abode by the rules then the claimed amount is credited to the respective bank's account.

3. Achievement of Solar Irrigation Pump: As of December 2012, an amount of Tk. 23.9 million disbursed for 8 solar energy driven irrigation pumps. No. of beneficiary farmers are 618 and bringing 920 bighas of land under cultivation with uninterrupted water flow enhancing the productivity and cropping intensity.

C. Solar PV Module Assembly Plant

1. Credit facility: Depends on assembly capacity of the PV module assembly Plant.

2. Interest rate for borrower: Bank finances at bank rate (at present 5%) + highest 3% that is 8% calculated on quarterly basis.

3. Re-payment period for the borrower: The loan with interest will be repayable within 5 years with 6 months grace period from the date of first disbursement where interest is imposed on quarterly basis.

4. Re-payment period for re-financing: Principal amount with interest is paid within not more than 5 years along with the grace period from the date of receiving first disbursement of re-finance.

5. Loan procedure:

J Entrepreneur/potential borrower submits the Project Profile to a bank.

J After feasibility study of the project, bank approves the project finance as per condition stated by BB circular to get refinance facility.

J After near completion/trial run of the project, bank submits the claim for refinance with all relevant documents.

J After receiving refinance claim from bank, BB examines the documents & inspects the project. If the provided documents & inspection report fulfills the condition stated on the circular then the claimed amount is credited to the corresponding bank's account.

6. Achievement: As of December 2012, an amount of Tk. 248.80 million disbursed for establishing Solar PV Module Assembly Plant.

D. Solar Mini Grid

J Recently a decision has taken to provide refinance facilities against financing in the sector of Solar Mini-grid at Nagorpur, Tangail.

J The cost of the project would be 6.75 million Taka.

J Capacity will be 25-KW/h.

J About 200 families are expected be benefited from this Mini grid project.


Policy for Setting up of Bio-gas Plant

1. Credit facility:

Minimum Tk. 18,000.00 to maximum Tk. 36,000.00 for existing cattle/poultry rearing plant

Maximum Tk. 3,00,000.00 for cow-rearing (4 cow model) plant.

2. Debt- Equity Ratio: Upon bank-customer relationship

3. Capacity of the plant: Minimum production and usage from 1.2 cubic meters to maximum 4.8 cubic meters on household/commercial basis

4. Eligibility: Institution/ family can get the loan jointly or individually.

5. Interest rate for borrower:

For existing cattle/poultry rearing plant

J If the bank finances a borrower directly, bank rate (currently 5%) + maximum 4%.

J If the bank finances throughcredit wholesaling by using MFIs linkage, bank rate (currently 5%) + maximum 5%.

For cow-rearing (4 cow model) plant

J At the borrower level, the rate of interest of the loan will be prevailing bank rate (currently 5%) + highest 4% for direct bank lending.

J If intermediary/agent is used by the banks, the rate of interest on the loan at beneficiary level will be prevailing bank rate (currently 5%) + highest 6% that is 11%.

6. Re-payment period for the borrower: The loan with interest will be repayable within 3 years from the date of first disbursement; interest is imposed on quarterly basis.

7. Re-payment period for re-financing: Principal amount with interest is paid on a quarterly basis within not more than 3 years from the date of receiving the first disbursement of re-finance.

Medium scale Biogas Plant

J Refinance facility are allowed on case to case basis for establishing medium scale bio-gas plant for both Poultry & Dairy farms to produce electricity & bio-fertilizer.

J Loan Limit is determined on the basis of civil expenditure of the bio-digester & cost of the generator.

J The refinance amount with interest will be repayable within 5 years with 6 months grace period from the date of first disbursement.

J At the borrower level, the rate of interest of the loan will be prevailing bank rate (currently 5%) + highest 4%.


8. Achievement of Bio-gas plant sector: In the sub sector of Integrated Cow Rearing and Bio-Gas Plant, an amount of Tk. 262.13 million has refinanced in 820 number of integrated cow rearing and Bio-gas plant as of December 2012.

J No. of Beneficiaries: 980 families

J No. of cows in the project: 3550

J No. of Chicken in the project: 14150

J Volume of Bio Digester: 4089 cubic meters

J Milk production per day: 25560 liters

J Production of Bio-gas per day: 1635 cubic meters

J Organic Manure per day: 21300 kg

J Under this refinance program, bio-fertilizer sector is included and banks are advised to extend credit facilities to this sector. As on December 2012, an amount of Tk. 0.4 million has been disbursed in this sector.

J Poultry and Dairy farm based medium scale biogas plant are also included on case to case basis. Poultry & Dairy based two bio-gas plants are established where bio-gas & bio-fertilizer are produced and generator is run by this gas to produce electricity. As of December 2012, an amount of Tk. 1.2 million has been disbursed in this sector.

E. Effluent Treatment Plant :

1. Production Capacity of the plant: Minimum 5 ton to maximum 20 ton daily

2. Treatment Capacity of ETP: minimum 500 cubic meters to maximum 2000 cubic meter

3. Credit facility: Maximum Tk. 1 crorebased on treatment capacity of the Plant

4. Debt- Equity Ratio: Upon bank-customer relationship

5. Eligibility: Biological, Chemical & Combination of Biological & Chemical ETP are eligible for Refinance

6. Interest rate for borrower:The interest rate of the loan will be prevailing bank rate (at present 5%) + highest 4%. The interest will be calculated on quarterly basis at the borrower level.

7. Re-payment period for the borrower: The loan amount with interest is repayable within 5 years with 6 months grace period from the date of first disbursement.

8. Re-payment period for re-financing: Principal amount with interest is paid on a quarterly basis within not more than 5 years with 6 months grace period from the date of first disbursementof re-finance.


9. Refinance Procedure of Effluent Treatment Plant:

J Entrepreneur of that sector submit their Project Profile to the bank.

J After study of the feasibility of project, if a bank is satisfied then it may approve the project finance as per condition stated in BB circular to get refinance facility.

J After near completion/trial run of the project bank submit the refinance claim with all relevant documents.

J After receiving refinance claim from bank, BB examines the documents & inspects the project.

J If the provided documents & inspection report fulfill the condition stated on the circular then the claimed amount are credited to the corresponding bank's account.

10. Achievement: As of December 2012, an amount of Tk. 90.36 million disbursed for establishing 8 ETP with effluent treatment capacity of 18000 cubic meter per day contributing significantly in limiting environmental pollutions.

F. Hybrid Hoffman Kiln (HHK) /Equivalent technology in Brick manufacturing Industry:

J For setting up of Hybrid Hoffman Kiln (HHK)/equivalent technology plant with a view to reducing carbon emission in the brick manufacturing industry.

J For single Kiln Brick manufacturing plant, the production capacity is 15 million brick's/year and for double Kiln, the production capacity is 30 million brick's/year.

J The establishment of plant should be completed within 6 months from the date of financing by the PFI's end.

1. Refinance Policy of Hybrid Hoffman Kiln (HHK) /Equivalent technology in Brick manufacturing Industry:

J Banks/FIs may claim the refinance facility against real cost of setting up of brick manufacturing plant using Hybrid Hoffman Kiln(HHK)/equivalent technology (expenses of infrastructure, & spare parts purchase) on partial basis or entirely at a time. Probable expenditures regarding consultancy, repairing and current capital expenditure will not come under refinance scheme.

J The refinance amount with interest will be repayable within 5 years with 6 months grace period from the date of first disbursement.

J The PFI will get maximum Tk. 20.00 million refinance facility against their disbursed loan amount in specific sector under this scheme.


A. SOLAR ENERGY Description for Urban Area

Description for Rural Area

Solar Panel Capacity 170W-520W Individual consumption: 10w-130W;Business consumption 520W

Maximum Loan Tk. 60,000- Tk. 175,000

Individual consumption: Tk. 10,000- Tk. 70,000; Business consumption: Tk. 175,000

Eligibility for loan approval

Individual/ collective households/ business institutions


Debt- Equity Ratio Upon Bank-Customer relationship

Upon Bank-Customer relationship

Direct: current bank rate 5% + Maximum 4%


Interest rate at customer's end

Credit wholesaling through NGO linkage: current bank rate 5% + Maximum 5%


Loan repayment duration for customer and interest calculation

Principal and interest payment by 3 years; quarterly interest payment

principal and interest payment by 3 years; quarterly interest payment

Loan repayment duration under re-financing scheme


principal and interest payment by 3 years; quarterly in terest payment

J Refinance procedure is same as the procedure of ETP Refinance.

2. Achievement: As of December 2012, an amount of Tk.124.47 million disbursed for establishing Hybrid Hoffman Kiln (HHK) technology in 3 brick manufacturing industry which reduces carbon emission in the brick manufacturing plants.

At a Glance: Matrix of the Refinance Structure for Renewable Energy Projects


A. Bio gas Plant

Establishment of plant within the existing farms

Integrated plant and cattle farm

Bio digester 1.2m3-4.8m3 Maximum 4.8m3 bio-digester + 4 better breed of cattle

Maximum Loan

Tk. 18,000-Tk. 36,000

Tk. 3,00 ,000

Eligibility for loan approval


Individual/collective households/ business institutions

Debt- Equity Ratio





Interest rate at customer's end


if there is an agent/ intermediary working for bank then, current bank rate 5% + Maximum 5%

Loan repayment duration for customer and interest calculation



Loan repayment duration under re-financing scheme




Sector-wise Disbursement Amount

Name of sector Disbursed Amount (Million Taka)

Solar Home System 103.73

Solar Irrigation Pumping Station 23.87

Solar PV module assembly plant 248.80

Bio-gas 262.92

ETP 90.36

Hybrid Hoffman

Kiln/equivalent technology in Brick

Field

124.78

Sub total 854.46

Approved but not yet disbursed 100.00

Total 954.46

Financing Brick Kiln Efficiency Improvement Project by ADB

The brick manufacturing process is energy intensive and is a major source of GHG emissions and particulate pollution in Bangladesh. The proposed project intends to establish a credit facility of $50 million equivalent in local currency at Bangladesh Bank for relending to participating financial intermediaries (PFIs) for the purpose of constructing more energy-efficient and environmentally superior brick kilns. The credit facility has two components: (i) to upgrade existing polluting brick kilns to a transitional design to preserve sector welfare while immediately reducing pollution, and (ii) to promote the most advanced brick kiln pilots to demonstrate their operational and commercial viabilities in Bangladesh. The combined efforts will help build more energy-efficient brick manufacturing capacities in Bangladesh to transform the sector to a modern and efficient industry.

Sectorwise Disbursement amount

15% 15%

10%

29%

31%

Solor Home System

Solor Irrigation PumpingStation


Bangladesh Bank is providing fund currently at 5% interest rate and participating banks/financial institutions are charging maximum (5% + 4% to 5% spread)=9% to 10% interest rate to the ultimate borrowers. In the proposed ADB Fund, this rate can be remained flexible if PFIs go for partnership arrangement.

Banking and Financial Institution Division (BFID), acting through MOF, will be the executing agency. Bangladesh Bank will be the implementing agency. BFID will establish a project steering committee, consisting of senior officials from Bangladesh Bank, BFID, Department of Environment (DOE), Finance Division of the Ministry of Finance (MOF), Ministry of Environment and Forest (MOEF), Ministry of Industries, and other relevant agencies, chaired by the secretary of the BFID. The credit facility will be administered by Bangladesh Bank's ACFID, where the project management unit will be established because of its experience in managing the $4 million equivalent HHK credit

Chart Flow 2a: Project Organization Structure

Bangladesh Bank, BFID, Department of Environment (DOE), Fianance Division of theMOF, MOEF, Ministry of Industries, and other relevant agencies, chaired by thesecretary of the BFID

Project Steering Committee

MOF($50 million ADB funds)

Executing Agency (EA):BFID, MOF

AdministrationAgreement

Participation Agreement:between

Bangladesh Bank and PFIs

Implementing Agency (IA):Bangladesh Bank

Design StandardVerification:

Department ofEnvironment (DOE)

Brick TechnicalBackstopping

Project Management UnitAgricultural Credit and

Financial InclusionDepartment (ACFID).

Sub-Borrowers:Participating Financial

Institutions (PFIs)

Sub-borrowers:Fixed chimney kin owners

to upgrade their facilities toimproved zigzag kilns

Sub-borrowers:Business owners toconstrust greenfieldadvanced brick kilns

Managementof Funds


Flow Chart 2b: Project Organization Structure

ADB = Asian Development Bank; ACFID = Agricultural credit and financial inclusion department (Bangladesh Bank); ADF = Asian Development Fund; FCK = fixed chimney kilns; HHK = hybrid Hoffman kiln; LIBOR = London Interbank Offered Rate; OCR = Ordinary Capital Resources; PFIs = participating financial institutions; VSBK = vertical shaft brick kiln.

ADBADF

($20 million)

Ministry of FinanceBFID

Bangladesh BankADF Imprest

Account($20 million)

Bangladesh BankADF Local Currency

Account ($20 millionequivalent up to 32

years)PFI repaymentEstablishes

revolving funds

PFI repaymentEstablishes

revolving funds

Sub-borrowersfor greenfield

construction ofVSBKs, HHKs, and

tunnel kilns

Sub-borrowersfor upgrade fromFCKs to improved

zigzag kilns

PFIFor onlending to sub-

borrowers

PFIsFor onlending to sub-

borrowers

Bangladesh BankOCR Local Currency

Account ($30 millionequivalent up

1 to 25

years)

Bangladesh BankOCR Imprest

Account($30 million)

ADBOCR

($30 million)


Financing of Bio Gas Plants*

I am delighted to be invited to this ceremony celebrating the financing of one thousand bio gas plants by Trust Bank limited by 2012, in a program taken up in FY 2009-2010 with Bangladesh Bank's (BB's) refinance support. This is indeed a joyous occasion for Trust Bank Limited and a milestone in progress of green banking in the country. I congratulate Trust Bank heartily for its steadfastly sticking to attaining its targeted financing of one thousand bio gas plants in rural households by year 2012; and I also extend my thanks to the Enterprise Development Company Limited (EDCL), Trust Bank's strategic partner in this initiative, for providing knowhow support to the borrower households in fully realizing the commercial potentials of the plants.

I am told that the number of plants financed has by now exceeded one thousand, spreading over Gazipur, Savar, Manikganj, Tangail, Rajshahi, Natore, and Serajganj; amounting to a total around Taka 30 crores. Each plant is based on a bio digester fed with organic wastes produced by four cows; besides bio gas as fuel for cooking and lighting, the plant owners are getting other important by products from their investments; the slurry from the digesters is useful organic manure, and the milk and calves produced by the cows are valuable protein sources for household consumption and commercial use. Besides reducing dependence on fossil fuels, these plants are thus promoting soil fertility and raising well being and income of the owner households. Subject to availability of adequate grazing land, the plants can be scaled up to larger units producing bio gas as fuel for electricity generation, running irrigation pumps and so forth. With reasonable attention to upkeep and maintenance, these plants would generate enough income and savings enabling debt servicing on the plants without stress. Nonetheless, to keep interest costs on borrowing low for those setting up bio gas plants BB is providing to the lending banks refinance at five percent interest per annum, from a Taka 200 crore revolving refinance window accessible against financing for eco-friendly or 'green' initiatives like installation of bio mass based, solar and other renewable energy generation units, effluent treatment plants, adoption of new energy efficient output processes and so forth. I would like to see Trust Bank and other banks engaging extensively in financing bio-gas units and other green initiatives wherever feasible throughout Bangladesh, in scales appropriate to specific local conditions. I am happy to learn that Trust Bank has

*Ceremony celebrating Trust Bank's financing of 1000 bio gas plants, 9 February 2013.


targeted a new milestone for financing of bio gas plants, at five thousand plants by 2015. I wish them all success in their endeavor; we at BB shall remain ready to extend supportive hand for all such green initiatives.

Adoption of 'green' or environmentally sustainable practices in financing brooks no delay for us in Bangladesh, one of the countries with highest vulnerability to climate change threats; notably the possible swamping of large tracts of the country's low lying Southern region by sea level rise from global warming. Limiting GHG emission remains a high priority in efforts to decelerate global warming, and we have to play our due role in these efforts as a country at high risk from this threat. Also, maintaining pollution levels at feasible minimum is a must if we are to keep our environment livable for our future generations. Such globally echoing concerns have prompted BB to begin guiding the country's financial sector towards an environmentally sustainable 'green' orientation. BB's CSR mainstreaming guidance circular of 2008 highlighted environmental sustainability issues alongside those of social and financial inclusion. This was followed by more detailed guidance circular of 2011 specifically on instilling green banking practices, both in internal processes and in environmental impact assessment of financing proposals. BB took care to kick the process off with setting examples in its own practices. A roof top photovoltaic solar plant was installed at its main building at HO to meet part of the energy needs where conventional lighting was replaced with energy efficient LED lamps/tubes. Online electronic messaging and data warehousing are reducing paper based communication and documentation. Conversion of the thirty storied high rise building at HO into a 'green' building has been taken up, where photovoltaic solar panels producing electricity for motion sensor energy efficient lighting, rainwater harvesting and waste water recycling facilities will minimize the need for power from national grid and water from supply lines. Banks are being encouraged to adopt similar approaches, in particular to install solar plants in rural agricultural/SME branches. BB guided modernization of the payments system with countrywide online interbank clearing and settlement has hugely facilitated mobile phone/smart card based financial services, reducing dependence on paper based processes. BB has also begun rating the green banking performance of individual banks, publicizing names of the ten top performing banks to incentivize high performance.

I am happy that our financial sector has been responding warmly to BB's call towards green banking, with diverse initiatives in greening of their internal practices and in adopting green financing approaches. 27 banks and one non-bank financial institution have drawn a total of Taka 109 crore from BB's refinance window up to end January 2013. Many of the green financing projects are likely to qualify for further assistance from CDM and other international sources; BB will be ready to consider enlarging its Taka 200 crore revolving refinance fund further as and when needed.

Presentations on our role in promoting green banking have been received warmly in related meetings of Rio+10 and COP events, I was among the few central bank governors attending these global events on environmental sustainability. I am confident that with the level of enthusiastic commitment and engagement demonstrated by our financial sector, green banking initiatives in Bangladesh will keep attracting yet wider recognition and attention from outside our borders.

Promoting Social Responsibility*

I feel enthused a lot about CSR related events in Bangladesh; particularly because at Bangladesh Bank we have for some years now been pursuing instilling of socially responsible business ethos in our financial sector institutions by mainstreaming of CSR in their corporate goals and objectives, guiding them into in-house and community based CSR engagements; towards fostering inclusive, equitable and sustainable socioeconomic growth and development. We now have a separate Department of Green Banking and CSR at the central bank, which is steering our campaign on socially responsible financing. Let me now take this opportunity of giving you a brief glimpses of the directions in which these engagements are progressing in the banking sector of Bangladesh.

Banks and financial sector institutions in Bangladesh are maintaining generally benign and safe working environment. Community engagements of financial sector's CSR programs focus both on one-off emergency humanitarian and disaster relief, as we have done to help the Savar tragedy victims and on continuing support of initiatives widening advancement opportunities for the weaker, less fortunate population segments in terms of healthcare, education and training. Besides these engagements involving sizable direct expenditure, CSR initiatives of banks include reaching out to financial inclusion campaigns for the under-served rural and urban population segments with financial services including financing for their productive farm and non-farm micro, small and medium sized enterprises. Their lending support for environment friendlier output practices (in renewable energy, effluent treatment, adoption of energy efficient output processes etc.) have also been growing rapidly. Annual reports of individual banks disseminate information on their CSR activities, and the central bank has been issuing consolidated annual CSR reports for the entire banking sector. Banks have also embraced green banking with the central bank's CSR guidance. They are weighing in environmental risks while making financing decisions, and extending funding support for adoption of environment friendly output processes and practices. All banks, state owned and private, local and foreign have been enthusiastic in their CSR engagements. Over the past few


*Launching of International Standard Social Responsibility Book jointly produced by High Commission of Canada and CanCham Bangladesh 1 June 2013, Canadian Club, Baridhara, Dhaka


years, direct and indirect expenditure of banks on CSR initiatives have increased manifold. Latest available data show that direct CSR expenditure of all banks increased by 5.5 times to Tk. 3046.7 million in 2012 from Tk. 553.8 in 2009.

CSR engagements have helped our financial sector to keep itself in good shape during the global financial crisis and in the subsequent still ongoing global slowdown. Besides keeping our financial sector free of non-productive toxic assets, the inclusive, output supportive orientation of financing has helped it both in supporting output growth and in upholding domestic demand in our economy, hastening decline of poverty and deprivation. Because of improving good corporate governance, on the other hand, the banking sector in Bangladesh is healthier than any time before in terms of capital, asset quality and capacity to manage internal as well as external shocks. We expect the financial sector embracing CSR ethos and objectives will in turn sensitize and activate its non-financial client businesses in CSR commitments and initiatives.

I am delighted to see High Commission of Canada and Reed Consulting Bangladesh Limited along with CanCham taking this proactive initiative in promoting CSR. I hope this would encourage other business and industry chambers in Bangladesh to emulate towards ingraining good corporate governance, of which good CSR performance is a necessary component. Indeed, businesses in Bangladesh and elsewhere will need to hasten establishing good CSR performance track records for holding on to and expanding their customer bases; because consumer lobbies in both developed and developing countries are voicing louder concern and demand for socially responsible performance from producers and providers of goods and services. The recent Savar tragedy is yet another eye-opener for all of us who care for socially responsible businesses.

The publication of this book is very timely and will strengthen the hands of those who are campaigning for more compliant corporate sector, particularly RMG in Bangladesh. This book covers a robust ground including seven principles of ISO 26000 with practical examples, e.g. accountability, transparency, ethical behaviour, respect for stakeholder interest, repect for rule of law, respect for international norms of behavior and finnaly respect for human rights. Step by step approach to implement these ISO 26000 principles along with benchmarking, monitoring, evaluating and improving SR activities. ISO 26000- not a compulsory regulation, a voluntary commitment for brand Bangladesh. It would be very useful for Bangladeshi businesses to engage themselves into CSR activities in a well structured manner, in line with evolving global guidance and standards from such sources as ISO 26000 and the UN Global Compact. I look forward to seeing other business chambers and associations, both financial and non-financial, sponsoring many more such appropriately structured CSR promoting activities.

CSR Support in Disaster Risk Management*

Disasters can strike anywhere. No country, rich or poor, is immune from risks of accidents and disasters causing deaths and injuries, destruction and damage to properties and assets; disrupting economic activities and livelihoods of individuals and households. In media reports almost every day we come across news of some disaster event or other striking somewhere around the globe. Country authorities try to build up preventive and preparedness measures against the types of disaster (floods, cyclones, droughts, deadly epidemics and so forth) that they tend to be prone to. Local and international voluntary support from organizations such as the Red Cross, Red Crescent usefully supplementing government efforts focus mainly on postdisaster rescue and emergency relief rather than preventive and preparedness measures. High income countries can much better afford prevention and preparedness measures as well as rescue, emergency relief and rehabilitation measures than is possible for a low income country like ours. Here community initiatives, businesses and charities do come forward alongside government with such resource support as they can afford; but dependence on external assistance remain substantial, particularly in severer disasters inflicting large scale fatalities and damages. Resource constraints limit focus of local efforts mainly on rescue and emergency relief; disaster prevention, preparedness and post-disaster rehabilitation tend to remain under-resourced, if not altogether unattended.

Prevention and preparedness measures actually merit high priority, however. Preventive measures reduce incidence of future disaster events, preparedness measures bring down fatalities and physical damages in disasters; together relieving potentially huge cost burdens of post-disaster rescue, emergency relief and rehabilitation. The recent Tazreen Fashions fire and Rana Plaza building collapse incidents causing well over 1100 fatalities and manifold more debilitating injuries to apparels sector workers laid bare the limitations of disaster preparedness of the country's emergency services in terms of needed equipment and ancillaries; besides spotlighting the criminal neglect of factory owners in complying with mandated safety standards and measures. Of course,


*Financial Sector CSR Support in Disaster Risk Management 30 September 2013, Governor, Bangladesh Bank


despite many limitations and handicaps, the Fire Brigade and other emergency services teamed up swiftly with the armed forces, public and private sector medical establishments, and volunteering local citizenry; doing their utmost in non-stop round the clock rescue and salvage operations for well over a month. Ready availability of adequate appropriate rescue equipment and amenities could have meant fewer deaths and injuries with swifter, more efficient rescue and salvage operations.

The financial sector and the broader business community in Bangladesh came forward with prompt, generous fund support for the rescue and relief efforts, by way of donations to the apex Prime Minister's Relief Fund. Bangladesh Bank itself, and banks and financial institutions enthused by the ongoing BB-led social responsibility mainstreaming initiative, together contributed one Billion Taka. These and other such contributions would presumably be used up entirely in extending emergency assistance for the affected families with little left for capacity building of the emergency services. Securing government's budgetary allocation for such capacity building purposes usually involve lengthy administrative processes, with possibility of fading off in priority as memories of distresses from disaster fade and public attention shifts to new exigencies.

In this context, Bangladesh Bank is contemplating a more targeted approach of specifically supporting disaster management capacity building in the Fire Brigade and other emergency services, by total or partial funding of procurement of such rescue and salvage equipment and ancillaries as they may need urgently for shoring up their capabilities. BB's own contribution and those of other banks and financial institutions for this purpose will be pooled together, its utilization to be decided and overseen by a committee of the participating institutions. The committee will need to engage intensively with the target emergency services to ascertain their needs. Financial sector institutions have no expertise or know how on how best to structure the contemplated support initiative; consultative support and assistance from institutions like the MRDI will therefore also be welcome. Lastly, once the initiative crystallize and take off, social responsibility driven nonfinancial businesses, including in particular those already in the UNGC Local Network Group, can also be invited to participate in the disaster management capacity building support group. In future, the committee can move on to support initiatives targeting other areas as new necessities emerge.


*Global Green Growth Forum (3GF) Round Table on 'Green Investment: A road map to scale up investments' 22 October 2013, Copenhagen, Denmark.

Promoting Environmentally Sustainable Green Financing*

For low income developing economies like Bangladesh, road map for green investment will need charting of both the buildup phase by awareness creation, motivation and support measures; and its scaling up putting in place policy reforms creating enabling conditions and incentives fostering larger investment partnerships for transition to energy efficient, GHG emission minimizing green infrastructure, phasing out the fossil fuel based emission intensive traditional infrastructure.

Environmental sustainability and climate change resilience are key elements of Bangladesh's inclusive socio economic development strategy; the government is accordingly facilitating private sector's green investments with various support measures including tariff waivers and tax holidays, besides making green infrastructure investments from own modest public resources. Progress attained has been significant, including inter alia in use of solar energy, bio-mass based energy generation, access to safe drinking water, and organic farming producing for exports as well as domestic consumption.

Available tariff waivers and tax breaks often do not fully cover the cost disadvantages in the green alternatives, particularly where subsidies exist on the traditional options, as in fossil fuels. There are some sources of further compensatory support like green investment promoting philanthropies and multilateral initiatives like the CDM. In general, however, such competitive cost disadvantage makes financing for green investment projects difficult to access.

Bangladesh Bank, the country's central bank, has opted to come forward with support in the initial build up phase of green investments, by awareness raising about urgency of green investments and facilitating financing access for these. BB began by launching an initiative of mainstreaming socially responsible business ethos and objectives in the financial sector; following up with thrust promoting inclusive, environmentally sustainable 'green' financing, drawing all banks and financial institutions into enthusiastic engagement. In green financing lenders are now routinely assessing and factoring in environmental risks in their financing decisions; financing only those that include needed mitigation measures against environmental risks. Besides introducing this environmental screening of borrowing proposals, BB's green financing initiative is also proactively supporting


financing of green investments for renewable energy generation, effluent treatment, and adoption of new energy efficient, emission minimizing output processes and practices, with low cost refinance lines for lenders from a BB window funded jointly by BB and an external development partner. Green projects thus supported with refinance include solar home systems, solar mini grid, solar powered irrigation, solar PV panel assembly, bio-fuel, effluent treatment, replacement of polluting brick baking kilns with energy efficient ones, organic compost, pico-, micro- and mini- scale hydropower, PET bottle recycling, solar battery recycling, LED bulb manufacturing, and so forth; evidencing significant spawning of innovative initiatives in diverse directions.

Scaling up investments in green infrastructure, particularly in renewable energy will require leveling the playing field in competing with the traditional carbon emission intensive options, by redirecting support subsidies and incentives towards the green alternatives and away from traditional ones in the domestic scene; as also by opening up to imports from green sources abroad. Such reforms are typically slow; beset with challenges of overcoming resistance of vested interests in traditional business as usual options. Multilateral development financing institutions like the World Bank and ADB can take larger role in helping developing economy governments with knowhow and resource support in green PPP investments. BB is working with IFC in promoting the private sector's awareness of green growth opportunities, to draw investors increasingly into green investments, local, foreign owned and joint venture. Bangladesh's foreign exchange regime is restrictive on investment abroad by residents, but fully open for non-resident owned FDI, FPI inflows and outflows.

Developing countries like Bangladesh are now on countrywide large scale sprees of residential, commercial, and public utilities building construction, involving massive total outlays. Energy efficient building would therefore be a high impact area for green investment to focus on in these countries, besides the energy infrastructure. In planning scaling up of green investments in developing countries like Bangladesh, it would be unrealistic to aim at total substitution of traditional options with first-best green alternatives; such attempt will risk seriously impairing food security and energy security for the broad masses of population.

Like traditional ones, the green options also bring up issues of concern (like risks to bio-diversity from big hydro power projects, pollution hazards from storage batteries in off grid solar power usage and so forth). A well chosen mix of the traditional and the new green options, consistent with a country's immediate needs and future growth aspirations, will need to co-exist; with utmost attention to maintaining optimal energy efficiency and emission minimization in each of these. Over the medium and longer term the innovation and growth spaces opened up by the new green options will help hasten fuller phase-out of the traditional options.


Promoting Green Finance Initiaties*

Environmental sustainability and climate change resilience are key elements of Bangladesh's inclusive socio-economic development strategy, actions promoting adoption of low carbon emission lifestyles, output processes and practices accordingly figure high in national policy priorities. The government is facilitating 'green' investments for adoption of new carbon emission minimizing energy efficient output processes and practices, with various support measures including tariff waivers and tax holidays. Significant progress has already been attained; interalia including rapidly expanding solar and biomass based energy usage in households, farming irrigation, dairies and poultries. Organic farming is growing fast, producing for both exports and domestic consumption. Available tariff waivers and tax breaks do not however always fully cover the cost disadvantages in the green alternatives, particularly where subsidies exist on the traditional options, as in fossil fuels.

There is limited awareness in the local financial sector and entrepreneurs about the supplementary support sources abroad like the green investment promoting philanthropies, social capital providers, and multilateral initiatives such as the CDM. Consequently, green investment projects with competitive cost disadvantages are finding financing difficult to access.

Bangladesh Bank (BB), the country's central bank, perceived space here for support intervention by awareness building about urgency of low carbon green investment options and the local and external support sources available for these; as also by mobilizing contributions towards lowering the financing costs.

BB's support intervention for green investment is an element of its broader intervention promoting inclusive, socially and environmentally responsible financing. This began with setting motivations right by spearheading ingraining of socially responsible business ethos and objectives in the financial sector, followed up by thrusts promoting inclusive and environmentally sustainable green financing; drawing the entire financial sector into enthusiastic engagement.

For green financing BB has provided banks and financial institutions framework guidelines consistent with national environmental laws and regulations as also with evolving international best practices, for use by individual

*Enabling role of financial sector related policies in national low carbon action: the Bangladesh experience, 23 october 2013, Climate & Development Knowledge Network (CDKN), London.


institutions with such modifications as are needed to fit in with their client segments; in assessing and grading of environmental risks associated with projects seeking financing. Their financing decisions are thus now factoring in environmental risks, financing only those that have the needed risk mitigation features.

Besides this environmental screening of financing requests, the BB guided green financing initiative is also carrying out awareness raising and promoting financing for renewable energy generation, effluent treatment, and adoption of new energy efficient, emission minimizing output processes and practices. Lenders to such green projects can access low cost refinance support from a BB window funded jointly by BB and an external development partner. Green projects thus supported with refinance include solar home systems, solar mini grid, solar powered irrigation, solar PV panel assembly, bio-fuel, effluent treatment, replacement of polluting brick baking kilns with energy efficient ones, organic compost, pico, micro and mini scale hydropower, PET bottle recycling, solar battery recycling, LED bulb manufacturing, and so forth; evidencing significant spawning of innovative initiatives in diverse directions.

BB is now working with the IFC in promoting the private sector's awareness of green growth opportunities, to draw investors increasingly into green investments, local, foreign owned and joint venture. Bangladesh's foreign exchange regime is restrictive on investment abroad by residents, but fully open for non-resident owned FDI, FPI inflows and outflows.

BB's green financing promotion initiative has been serving purpose usefully by significantly heightening the awareness and engagement of Bangladesh's financial sector in green investment opportunities in Bangladesh. Green investments supported so far by the BB initiative are small sized; these and upcoming others will face further challenges ahead in mobilizing financing and expertise for scaling up to sizes that can better ensure their sustained viability. BB intends therefore to broaden its green financing promotion initiative further, making it useful platform liaising local green investment entrepreneurs and financiers with technical expertise and financing sources abroad including multilaterals, social capital providers, philanthropies, venture capitalists and so forth. BB remains eager to learn from experiences with similar initiatives elsewhere, as also to share its own experience for possible usefulness to others.

PART SIXDigital Bangladesh and IT in Banks


CIB Online Credit Bureau Project*

I am very happy to be here with you in this formal kickoff event for the online credit bureau project of the CIB. The project is crucially important for enlarging and upgrading the capacity of CIB for storing, handling and delivery of credit information from and to banks and financial institutions in high and fast expanding volumes. Besides steady growth in business and personal loans to larger, more affluent clients, banks and financial institutions are expanding their portfolios of smaller sized but numerous SME and agricultural loans; responding to the high policy priority now being accorded to financial inclusion, towards faster and more inclusive economic growth. Capacity of the existing CIB set up is already under heavy strain in responding to the current volumes of credit information requests, and the expansion in SME and agricultural lending that we are soon to see will make handling of credit information unmanageable without enlargement and upgradation of capacity in the CIB.

Timely availability of reliable credit information is of utmost urgency in maintaining asset quality of the lending institutions; implementation of the now kicked-off online credit bureau project therefore brooks no delay. I am heartened to see that unlike many other projects languishing after kick-off in haste, the online CIB project has gone far in completing the preparatory spadework well before the formal kick-off event. I take this opportunity to express my thanks and gratitude to DFID and IFC for their enthusiastic interest and financial and technical support for this important project.

The existing capacities including software facilities in the CIB dating back from 1992 were developed and maintained in-house by BB's own IT department staff. I would like to urge CRIF andits associates executing the project to engage intensively with this bunch of BB IT department staff in shaping the operational architecture and customized workflows best suited to current and likely future needs, transferring to them newer state of the art know-how and skills. This will certainly go a long way in transforming today's BB into a truly digital BB.

I would like to conclude with thanks to the hosts for inviting me to this event, and with assurances of wholehearted BB support for timely, successful completion of the project.

*Formal inauguration of the CIB online credit bureau project at Bangladesh Bank on 6 December 2009.


*Inaugural address at a National Seminar on 'Vision 2021: Challenges for Engineering Profession' held at IEB, Dhaka on 3 January, 2010.

Vision 2021: Challenges for Engineering Profession*

The paper focuses on the importance of Information and Communication Technology (ICT) and the role of engineering profession in achieving an efficient digital Central bank as well as the financial sector in Bangladesh; required for pushing the country on course to the targeted vision of digital Bangladesh by 2021;the year of Golden Jubilee of our independence. Bangladesh Bank (BB) has adopted advanced ICT to be digitized in all spheres of its functions including monetary policy, banking supervision and internal management. BB has already introduced e-commerce, e-banking, automated clearing house etc.; a historic move towards achieving higher productivity across all economic sectors including agriculture and SME through use of ICTs. Engineers could be pioneer innovating new applications of ICT, and provide them to the doorstep of the common people.

The universal role of Information and Communication Technology (ICT) is vital for socioeconomic development of a developing country like Bangladesh. Availability of information helps increase productivity; ensure fair and competitive market; empower marginal people. Digital technology makes things easy getting at any place, mobile phone as the medium of money transfer and payment of utility bills, for example. A village person can download his/her passport application form in a local e-centre.

The term 'Digital' comes from Latin word 'digitus' ('finger' in English), as fingers are used for discrete counting. A digital system uses discrete (discontinuous) values to represent information. Indeed, it can be either discrete, such as numbers, letters or icons, or continuous, such as sounds, images etc. Digital or electronic technology generates and processes data or information, which is primarily used in communications and fiber optic transmission. And in all these activities, engineering knowledge can be strategically useful. In particular, the young generation with adequate engineering education can indeed be a demographic bonus. This has happened in our neighbouring country India, and I am sure we too will probably move in the same direction in the coming days.


Digital society means knowledge based society. Therefore, present Government has placed the vision of 2021, the year of Golden Jubilee of our independence. The vision envisages a digital Bangladesh with an excellence in information and communication technology and high-performing inclusive economic growth.

A country like Bangladesh goes digital means it will be an e-state combined with e-governance, e-banking and e-commerce, e-learning, e-agriculture, e-health and so on. However, the vision encompasses much more; there is a strong correlation between economic and social development of a country and its proficiency in science and technology; we need knowledge based society, efficient management and skilled human resources as well.

We need to extend ICT facility in each and every village in Bangladesh, so that even farmers can get access to internet connectivity; acquire related information regarding his/her crop/product development, pricing etc. In this connection, present government has already taken initiative to connect Bangladesh with the second Submarine Cable Network to have secured connectivity with the information super highway. Realizing the potential of ICTs for national development, government has already approved the 'National ICT Policy 2009' on priority basis.

It is expected that by 2021, Bangladesh will have a countrywide ICT network; ensure high speed information flow between centre and periphery; instructions will be transmitted electronically; accelerate the national decision-making process; monitor the performance of all agencies.

High level of internet penetration is a must for the development of ICT where engineers also have a strategic role to play. However, we stand on a low level of internet diffusion. The latest statistics (ITU 2007) revealed that internet penetration is only 0.3 percent in Bangladesh, whereas the rate is 7.3 and 5.3 percent respectively in India and Pakistan. However, we too are getting ready to experience higher level of internet penetration particularly with high density of wireless infrastructure. Bangladesh Bank which is indeed the nerve centre of financial world cannot remain behind in this race of digitization.

Bangladesh Bank, being the monetary authority of the country, is at the forefront of government's firm commitment to be digitized. We have already formulated a 5-year strategic plan for the financial sector based on advanced technological applications to deliver services with utmost efficiency. The ultimate goal is to make Bangladesh Bank a world class Central Bank with high applications of technologies. This should, in fact, transform itself into a paperless organization within this plan period.

Bangladesh Bank has achieved a historic milestone in trade and business arena, departing from conventional banking with the introduction of e-commerce recently; a giant stride towards digital Bangladesh. Banks have been allowed to make online money transactions; payment of utility bills through internet, transfer of funds (account to account), payments for trading goods and services, and facilitate online credit card payments in local currency. Indeed, the electronic payments will be considered as cash transactions, which will be regulated under the 'Anti-Money laundering Act' as well as other relevant rules


and regulations. A national payment gateway, connecting all banks for inter-bank transactions (e-banking) is expected to be established soon. Electronic Fund Transfer will also be possible in near future.

Installation of 'Bangladesh Automated Clearing House (BACH)' is another remarkable event in the history of financial sector in Bangladesh; will ease the remittance channel and payment system, and therefore, bring dynamism in business activities. The system has been started in early November 2009 on experimental basis, participated by some well prepared banks; will be inaugurated formally soon. Applying sophisticated technological method, the system needs only images and corresponding information of the submitted cheque leaves instead of physical one; will send them to the BACPS (Bangladesh Automated Cheque Processing System) using a secured communication link. New cheques/clearing instruments (standardized) will contain Magnetic Ink Character Recognition (MICR) line that encompasses information regarding the amount, transaction code, clients account details, routing number (numeric code assigned to bank branches for easy identification of origin and destination of the instrument), cheque leaf's serial number and so on. The system will support both intra-regional and inter-regional clearings based on a centralized processing centre in Dhaka and designated clearing regions; conforms to the international best practices, cost effective solution for cheque processing.

Therefore, after getting customers' cheques for collection in the bank-branch, collecting banks will check the prima facie information of the submitted cheques, capture images and information, and send them to BACPS electronically. BACPS will then process and send the images and information to the paying banks for validation. Paying banks will examine the pertinent images and information, and send back to the BACPS for payment (further examination if any inconsistency like fund insufficiency or mismatch of signature etc.). Then BACPS will accumulate all the information; workout a single net amount for each bank, and send back to the collecting banks. As such, cheque clearing time is expected to be turned down to a single day for countrywide payment. In other cases, this will be a matter of couple of hours only. Disaster centre for retrieving data.

Using cell phone as a tool, extends banking services to the door of the mass people. An account holder can check account history/statement, status on cheques, payment order or stop payment and so forth. However, initially three commercial banks have been allowed mobile banking to accelerate inward remittance transfer with the help of the outlets of mobile companies. Recently, Bangladesh Bank has strengthened its monitoring and supervision activities on agricultural and SME loan with the help of the existing countrywide mobile network, keeping record of cell phone numbers of farmers and small entrepreneurs.

Online CIB report is a pivotal component of risk management measure, is expected to be launched by October 2010. Banks and financial institutions will be able to access the CIB data base online, and get the credit report of the concerned borrower. The database consists of detailed information of individual borrowers, owners and guarantors. Meantime, a project 'online credit bureau' has been started using advanced technology to establish online connectivity between CIB (Credit Information Bureau) of Bangladesh Bank and Head offices of


all banks and financial institutions. It becomes crucial to upgrade the capacity of CIB to respond the policy priority accorded to financial inclusion; expansion of SME and agricultural lending, and overall increasing growth of trade and business. Online CIB will minimize the extent of default loan by facilitating the banks and financial institutions with credit reports of the loan applicants very quickly, and therefore, lending institutions would not encounter any credit risk while extending lending or rescheduling facility.

Good health is desirable, and also a fundamental right. Therefore, a modern and technology based health care system has been developed in the Central Bank keeping electronic record of medical information including disease and medicine history of the patients, digital prescription, stock of medicine etc.

Central Bank reform program initiated ICT packages; includes Networking, Banking application, Enterprise Resources Planning Solution, Enterprise Data Warehouse etc.; with a view to ensuring efficient management of assets including human resources.

Under networking program, all the departments of Bangladesh Bank Head Office and its nine branch offices have already been brought under computer network (LAN/WAN) connecting almost 3100 PCs. Therefore, any official sitting elsewhere in Bangladesh Bank (Head office or branches) has access to the same kind of resources; sharing knowledge and information; ensure knowledge based management.

Enterprise Resources Planning (ERP) solution covers digitization of procurement (e-procurement), cash management, access control etc. Meanwhile, recruitment process under Bangladesh Bank has been digitized (online application, sorting, validation etc.).

Banking application includes automation of all the accounts with Bangladesh Bank (banks, financial institutions and government), Foreign Exchange Management, Currency Management, Treasury and Securities Systems/Module, Public Debt Management Module, and also establishment of a Central Depository System (CDS) to build a platform for secondary trading of treasury bills and bonds.

Enterprise Data Warehouse (EDW) creates an electronic data bank, which will provide all information and statistics of monetary, trade and fiscal areas of the national economy, whereall the concerned people of BB will have access to use it for further policy analyses.

Bangladesh Bank is going to commence web based e-tendering system which covers announcement of tender, distribute schedules, bidding etc. to ensure simplicity and transparency of tendering process. Already no paper application is accepted for employment.

These are only a few examples of how fast the Bangladesh Bank is progressing in the process of digitization of its activities. In addition, it is also taking other banks and government agencies on board to ensure speedy, credible, user-friendly financial services to all.

Moreover, Bangladesh Bank has been encouraging green engineering by


installing solar panels on its own premise and providing re-financing windows to support speedy development of solar energy, biogas and effluent treatment plants all around the country.

And in all these activities the role of green engineers will be vital. This is yet another step towards Digital Bangladesh.

Engineers, deserving enormous potentials in ICT and related technology are playing a key role in materializing the digital Bangladesh Bank including the entire financial sector; required for pushing the country on course to the targeted vision of digital Bangladesh. ICT engineers of Bangladesh Bank have already developed 68 different applications which are in operation, and another 18 applications are in progress. Besides, maintenance of entire system, ICT equipments and applications are carried out by other engineers.

The major challenges for Bangladesh are poverty reduction and sustainable development, but neither of these are possible without a strong science and technology base underpinned by excellence in education at all levels and a well-trained work force in ICT. There needs to be infrastructural development and technology transfer throughout the country to disseminate knowledge to even remote areas of the country. However, present government has taken initiatives to promote ICT among all spheres of people, including the hard-to-reach areas; tax and duty cut on computers; promoting ISP services etc.

A broad band infrastructure is needed with access for every Bangladeshis from their homes, work places, schools, tele centers with Wimax and 3G network; a digitally literate population and workforce; digital business development; a legal frame work that assures freedom of expression while protecting the rights of creators and innovators towards building an indigenous knowledge and technological base.

At the beginning, we must concentrate on the development of infrastructure in terms of hardware, software and manpower. Skilled manpower from local market must be available to keep the system running without depending on foreign "experts". Sustainability of Digital Bangladesh depends on our enhanced ability to maintain, repair and expand once the system is installed. In order to manage a sustainable digitized Bangladesh, we need a long-term planto produce adequate number of scientists, computer and communication engineers, software engineers; technology management experts etc. for further development of our ICT sector keeping pace with the technological advancement in the developed world. Otherwise, Digital Bangladesh would be highly vulnerable and dependent on foreign manufacturers and experts. Simultaneously, we must encourage our young engineers to move towards civilization of less or no fossil fuels. This green engineering will have to be one of the strategic components of Digital Bangladesh. Certainly, we will opt for technology based economy. But that economy must also be socially responsive to the needs of the disadvantaged. In other words, we pledge to build a more inclusive Digital Bangladesh where engineers too will play the desired strategic role.

This vision is to see Bangladesh Bank paperless within the shortest possible time; all correspondence (both internal and external) will be online; achieve


higher productivity across all economic sectors including agriculture and SME through use of ICTs. Steps have been taken already to bring overall functions and activities of Bangladesh Bank under automation. Its supervisory functions have been further strengthened applying advanced banking techniques with innovative technology.

It can be noted that technology-driven business models, followed by the banks and financial intuitions ensure better and faster services to the clients. A recent study of Bangladesh Bank revealed that banks that adopt technology are more profitable and reduce risks as they gain maturity in offering such services.

Bangladesh Bank has already engaged banks in major programs of upgrading their IT platforms with ample processing powers and online connectivity; to enable efficient data management, processing and analyses in banks for own risk management purposes and reporting to BB.

A holistic approach needs to be taken by all the stakeholders to reach the ICT facilities to the doorstep of the common people. Engineers could be pioneers in this regard innovating new applications of ICT, and thus move forward the nation towards digital Bangladesh.

Simultaneously, they should also be responsive to the challenges of climate change, and hence move towards green engineering. Bangladesh Bank is well aware of its responsibility in promoting green finance for greener Bangladesh. I am sure engineers too will play their desired role in this fight for a greener energy based Digital Bangladesh.


*Launching a publicatin on 'Branchless Banking' organized by Department for International Development (DFID) and Consultative Group to Assist the Poor (CGAP) on 27 January 2010.

Financial Services and New Technologies: Looking ahead to 2020*

I am happy to be invited to this DFID-CGAP event launching a publication on branchless banking, and organizing deliberations on aspects and implementation issues of relevance for Bangladesh and our region. I expect the new publication and today's deliberations to bring up new insights and clearer roadmap options for optimal leveraging of potential synergies in partnerships between financial service providers and technology platforms in extending branchless banking, or remote delivery offinancial services, particularly to the population segments that brick and mortar bank branches have so far been unable to reach out to cost effectively.

Branchless banking has for several decades now been a tantalizing and somewhat elusive promise of the new fast evolving information technologies that financial service providers have been eagerly embracing. Technology is yielding them high benefits in terms of scale efficiencies and cost savings, but the appeals of brick and mortar bank branches have not gone away. Financial services are based on mutual trust between providers and clients, thriving best in familiarity from face to face personal contacts. I look forward to branchless banking in Bangladesh not as an alternative, but as a key supplement enabling traditional branch banking to reach out to new client segments in dispersed rural or otherwise remoter locations, a priority of Bangladesh in pursuit of rapid inclusive growth with fullest possible financialinclusion.

The cultural homogeneity and high population density of Bangladesh are features auguring very well for success of a technology driven thrust in branchless banking. Six mobile phone companies have brought the entire country under comprehensive network coverage, with steady growth in number of mobile phones in use (already well above fifty million, in a total population nearing one hundred fifty million), and also with ample spare airtime and information processing capacity to engage in partnerships with licensed and regulated financial service providers to devise and introduce innovative cost effective means of reaching out to the as yet financially excluded population


segments (about a quarter of the adult population)with payment, deposit and other services including disbursement and recovery of loans.

Bangladesh Bank is on the lookout for such creative partnerships in regulated IT based remote delivery of financial services. A number of BB approved initiatives are already in operation (to begin with, mainly in utility bill payments and in delivery of remittances from Bangladeshi workers abroad to their families at home), others are at various stages of implementation, with some of these including smartcards and POS terminals in delivery networks besides mobile phones. Besides people in dispersed remoter locations, working internal migrants sending money home, urbanites paying utility bills and other routine expenses like insurance premium and school fees etc., senior citizens drawing pensions and social security benefits, and the technophile young can all be expected to be avid users of financial services afforded by branchless banking. Banks can usefully employ technology based branchless banking to disburseand recover loan installments to and from small landholder farmers and rural non-farm enterprises cost effectively; with only occasional field visits to appraise borrowers and to complete documentations. Also, expansion of branchless banking will at least to some extent ease the demand pressure for cash currency notes; which are expensive to print, circulate and to dispose of when no longer usable. Of course, technology based branchless banking will have its own set of technical and operational risks to be mitigated and appropriately managed.

Let me conclude with my heartfelt thanks to DFID and CGAP for organizing this event to heighten awareness and engagement of our financial service providersand their potential partner technology platforms about the high promise that branchless banking holds in terms of business prospects and expanded customer base over the medium term, besides the above outlined broader benefits for the population and the overall economy. I wish all success for the deliberations in identifying viable roadmap options, aiming at full financial inclusion in Bangladesh by 2020 with optimal use of technology based branchless banking.


*Seminar on 'New business opportunities after opening of digital payments' organized by Bangladesh Association of Software and Information Services (BASIS), 10 February, 2010.

New Business Opportunities after Opening of Digital Payments*

I am happy to be with you here in this BASIS seminar on new business opportunities opened up by the go ahead for e-payments given recently by Bangladesh Bank as the country's payment systems regulator. Even with the limited urban centered ICT infrastructure now available in Bangladesh, opening up of e-payments or digital payments should significantly enhance the ease of concluding payment transactions within and between businesses, individuals and public institutions. I see this as a crucially important step forward in realizing the government's overarching vision of 'digital Bangladesh' with extensive use of ICT in all spheres of social life, public and private. Automated clearing of cheques and electronic fund transfers soon to commence in BACH under BB supervision will further facilitate digital payments.

Besides countrywide extension of the ICT connectivity backbone, the e-governance agenda under the digital Bangladesh vision will entail explosive growth in requirements of diverse range of software and data management services; you will be deliberating upon this issue in detail in this seminar. I am no technology geek to fully comprehend the nature and extent of all these requirements, but I can see that the opportunities ahead for ICT professionals are immense. The challenges facing you in rapid capacity building are clearly just as immense, because we won't wish to see Bangladesh rendered heavily dependent on external expertise in installing and running the vast ICT infrastructure for e-payments and e-governance. We look forward to substantive engagement of the bright young crop of local ICT professionals alongside external experts in installation and commissioning of various components of the ICT infrastructure; in the process acquiring know-how and skills for running, maintaining and customizing the systems installed. The expertise and skills thus acquired by local ICT professionals will hopefully make possible major breakthroughs in export of ICT services from Bangladesh, which has remained small thus far.


ICT sector entrepreneurs are welcome to financing support by way of equity participation from the government's EEF, and challenge fund grants under the DFID supported RPP project of BB in developing and implementing ICT projects and innovative payment service solutions. We at BB will remain open to ideas and suggestions about further policy support options for development of e-payments and the broader ICT sector.


*Launching Ceremony of Foreign Remittance Payment Project of BURO Bangladesh, 2 March 2010.

Foreign Remittance Payment: Partnership between Banks, MFIs and IT Platforms*

I am very happy to be invited to the formal launch of the new web based and POS terminal based remittance delivery arrangement, developed with RPCF grant support, in partnership of BURO an MFI, Cashlink Bangladesh, an IT platform, and six banks; for prompt delivery of remittances of Bangladeshi workers abroad to their beneficiaries at home. I am happy to note that the new arrangement has already delivered remittances totaling USD 45 million, before its formal launch. I am also pleased to know that BURO has already set a target for remittance distribution of USD 125 million by 2010.

This is precisely the kind of partnership between banks, MFIs and IT platforms that BB is actively encouraging for efficient and swift delivery of payments and other financial services to population segments in dispersed remoter locations in Bangladesh that cannot be served cost effectively by bank branches. I congratulate BURO for its success in having already brought in six banks on board, and I am further heartened to know that yet more banks are being approached to make use of the new remittance delivery arrangement. I look forward to utilization of the new arrangements by banks not just for remittance delivery but also for delivery of other financial services like taking of deposits from and disbursement and recovery of agricultural and SME loans to farmers and rural entrepreneurs, realizing BB's vision of fuller financial inclusion of all population segments in all regions of Bangladesh.

Commissioning of automated inter-bank clearing in BACH at BB, due next month, will facilitate secure and fast inter-bank settlement of claims, including those from the remittance delivery arrangement being launched here formally today. I believe that the bank and nonbank partners in the new arrangement will work out suitable ways of maintaining optimal stocks of cash available at delivery points; Bangladesh Bank will be happy to provide such support and guidance as may be needed. Rapid expansion of card based delivery arrangement will reduce the need for cash balances, also helping promote savings habit in card holders.

I would like to conclude here, heartily congratulating the project partners and wishing them all success in bringing payment services closer to the doors of beneficiaries; also thanking RPCF for its grant support for the project.

New Era in Banking*

Information and Communication Technology (ICT) plays a vital role in supporting and maintaining economic development of a nation by simplifying, hosting and integrating activities atmulti-sectoral levels. Empirical analyses suggest that there is a strong correlation between a country's socio-economic development and its proficiency in science and technology. With the viewof developing a digital Bangladesh, the present government has placed its 'Vision 2021' where high performing inclusive economic growth will be attained with the virtue of modern ICT.

Bangladesh Bank (BB), being the monetary authority of the country, is at the forefront of government's firm commitment to be digitized. BB has adopted advanced ICT in all spheres of its functions including monetary policy, banking supervision and internal management. BB has already introduced, e-banking, e-commerce, e-recruitment, e-tendering, mobile banking, automated clearing house etc.; a historic move towards achieving technology-led productivity across all economic sectors including agriculture and SME.

Prompt and safe delivery of workers' remittances, at affordable costs, to recipients in rural areas away from bank branches has for long remained a challenge for banks. BB has now been encouraging partnerships between banks and mobile phone networks for extending banking services to the door of the mass people. Fast expanding mobile telephony in Bangladesh already

covers well over half the total adult population. This has opened up windows of opportunity for creative partnerships of banks and mobile telephone companies in devising cost effective arrangements for delivery of remittances (and eventually other financial services) through the countrywide area agent networks of mobile phone companies covering rural areas distant from bank branches. A number of such BB approved partnerships are already active and some more preparing themselves for launching.

Farmers now can open bank accounts at only Taka 10. About 9.0 million farmers have already opened accounts since the measure taken by BB. Since many farmers depend on remittances for their household expenditure, they will


*'A Roundtable Discussion on ICT Budgeting organized by NeoStar Alliance (NSA), 21 May, 2010.

now be able to receive remittances directly to their accounts more easily and quickly. Banks have been well advised to keep these accounts active and operational for effective financial inclusion. Use of biometric and mobile technology should also be encouraged in this process of financial inclusion. Besides, BB has strengthened its monitoringand supervision activities on agricultural and SME credit with the help of existing countrywide mobile network, keeping record of cell phone numbers of farmers and small entrepreneurs.

Installation of 'Bangladesh Automated Clearing House (BACH)' is a remarkable event in the history of financial sector in Bangladesh which will ease the remittance channel and paymentsystem, and therefore, will bring dynamism in business activities. The system has been started in early November 2009 on experimental basis, participated by some well prepared banks and will be inaugurated formally soon. The progress in this front is notable as more than 80 percent checks are being cleared automatically. Those banks that are yet to send the images of checks electronically are paying for their non-performance. Hope, all the banks will rise up to the occasion and show their full commitment for this IT option. Online CIB report, a pivotal component of risk management measure, is expected to be experimentally launched by June 2010. The final operation of CIB online will be launched in 2010 when banks and financial institutions will be able to access the CIB data base online, and get the credit report of the concerned borrower. Besides, a national paymentgateway, connecting all banks for inter-bank transactions will be established soon. Necessary technical and financing preparations have all been completed in this regard.

BB has introduced Taka 2.0 billion refinance line in FY 10 against bank loans for environment friendly investments in solar energy, biogas plants and effluent treatment plants. Recently, BB switched over to solar-powered lighting by setting up a 20 kilowatt solar panel, as a move towards encouraging green energy in Bangladesh. A new refinance facility of Taka 5.0 billion has just been introduced to capacitate jute sector, the age-old green pillar of Bangladesh economy.

Central Bank reform program initiated ICT packages includes Networking, Banking application, Enterprise Resources Planning Solution, Enterprise Data Warehouse etc.; with a view to ensuring efficient management of assets including human resources. Under networking program, all the departments of BB Head Office and its nine branch offices have already been brought under computer network (LAN/WAN) connecting almost 3100 PCs.

Enterprise Resources Planning (ERP) solution covers digitization of procurement (e-procurement), cash management, access control etc. Enterprise Data Warehouse (EDW) creates the platform of electronic data bank, which will provide all information and statistics related to monetary, trade and fiscal areas of the national economy, where all the concerned officials of BB will have access to use it for further policy analyses. Recently, BB has commenced web based e-tendering system which will cover announcement of tender, distribute schedules, bidding etc. to ensure simplicity and transparency of tendering process. Bangladesh Bank website, one of the highest resourceful websites among the Government agencies, is continuously updating information for the end-users.


The present government of Bangladesh has identified ICT as one of the major thrust sectors for rapid economic development, reducing unemployment and poverty alleviation. As part of it, thegovernment has made ample allocations for ICT in the national budget and has already met the target set for FY 2009-10. Under Equity and Entrepreneurship Fund (EEF), around Taka 45.0 crorehas been disbursed against 34 projects during 2002-2010 for the development of ICT sector and another Taka 168.6 crore is waiting to be disbursed. We have involved representatives from the IT sector in processing and approval of the IT projects under EEF. The onus is now on the IT entrepreneurs how they make the best use of this budgetary opportunity.

BB's vision is to be paperless within the shortest possible time where all correspondence (both internal and external) will be online. BB is accordingly formulating and implementing proactive policies as well as providing guidelines to the banks and financial institutions in devising cost-saving innovative financial products with the mission of digitizing the financial sector over the near and medium term. Going digital is, in fact, a change in mindset.

The BB leadership has been not only encouraging its officials to change the gear but also providing hands on training, constant monitoring and of course, incentives for good performance. Steadily, BB is emerging as a show case of success story in IT adoption. I will encourage all the stakeholders present here to watch the progress made in the IT front in BB and provide necessary technical help wherever needed. Some of them are already sitting in many of our advisory panels and I want to take this opportunity to thank them from core of my heart.



E-payment gateway*

I am glad to be invited to this launching event of BRAC Bank's e-commerce payment gate-way for internet based online purchases and sales of goods and services. It is a major step forward in materializing the government's vision for digital Bangladesh, and in the ongoing drive for deeper, broader financial inclusion.

As traffic congestions and gridlocks keep worsening in major urban centers like Dhaka, it is getting increasingly difficult and time consuming for people to physically visit vendor locations to see goods and services on offer and to ascertain fairness of prices asked for. E-commerce is an attractive alternative around this difficulty, with purchasers visiting vendor websites online to see what are on offer at what prices, and to order the chosen goods or services at the best available prices. There are positive externalities for others as well, with increasing online transactions contributing to easing of pressure of vehicular traffic and crowding in high streets. While some banks already have engagement in e-payments for e-commerce transactions in varying degrees, I am told that BRAC Bank's new e-commerce payment gateway is also integrating with VISA and MasterCard, which will enable e-payment settlements through the BRAC gateway not only by BRAC Bank account-holders but also by clients of other banks holding cards issued by VISA and MasterCard. In addition to payment settlements related to e-commerce, the e-payment gateways of banks are useful for payments and receipts of utility bills, salaries, pensions, and so forth.

BRAC bank has substantial engagement in SME financing; I will look forward to its initiatives in getting the SME borrowers individually or collectively to utilize the e-payment gateway extensively for web portal based sales of their products and services to buyers within and outside Bangladesh.

BB will be happy to support such initiatives, and will provide appropriate procedural instructions about receipts against sales to buyers abroad.

To further facilitate e-commerce and other electronic payment transactions, BB has already taken initiative to put in place a National Payments Switch connecting all e-payment switches (ATM, POS, Mobiles, Internet etc.) in the

*Launching Ceremony of BRAC Bank e-payment gateway, 19 December 2010.


country, expected to be operational by the end of 2011. I would urge close co-operation and collaboration of banks in Bangladesh in developing cost effective, efficient e-commerce business models and solutions for different market segments; opting for sharing of solutions to the extent possible for cost saving. Co-operation and collaboration will be particularly important in ensuring security and safety in e-commerce transactions. Identity theft and fraudulent transactions are major threats to safeguard against in ecommerce transactions, awareness raising and continual upgrading of security and safety features will be necessary to remain ahead of fraudsters ever busy devising newer ways of breaching into the e-payment gateways and systems. BB will continue to promote and support expansion and upgrading of infrastructure arrangements for e-commerce and other e-payments; and as regulator will continually monitor developments in the operating standards and security standards in line with international best practices.


E-Payments in Bangladesh: Opportunities and Challenges*

A modern payment system is a necessity for the economic growth and development of country. Electronic payments systems are the most sophisticated and advanced part of the modern payment system. A modern payment system can facilitate the business community as well as the whole nation with a speedy fast safe & secure money transfer arrangement to meet payments obligations which can increase the velocity of the money, ultimately the economic growth and development of the country.

Bangladesh Bank has been working on to implement secured and efficient payment systems in the country. A number of initiatives have been taken since October 2006 for modernizing country's payment systems.

Electronic payments are recent developments in the payment system arena of our country, the term used for any kind of payment processed without using cash or paper based instruments. Forms of electronic payment includes EFT, Card based payments, Internet payments and Mobile payment.

In 2006 in partnership with the Department for International Development (DFID), U.K., and Bangladesh Bank has embarked on a project to modernize Country's national payment system. Implementation of Bangladesh Automated Clearing House is the most visible achievement under this initiative. BACH is a state-of-the art technology through which achieved a world-standard to facilitate the payment systems of the country. In the way of developing the BACH an automated payments infrastructure has been developed for the banking sector of the country.

Bangladesh Automated Clearing House has two components: the Bangladesh Automated Cheque Processing System and Bangladesh Electronic Funds Transfer Network. On October 07, 2010 Automated Cheque Processing Systems went live.

Bangladesh Automated Clearing House has launched its second component called Bangladesh Electronic Funds Transfer Network (BEFTN) on Feb. 28, 2011. This is a brand new payment option for the country which needs aggressive marketing campaign and greater commitment towards the process change. This

* 'E-Payments in Bangladesh: Opportunities and Challenges', 4 June 2011.


new payment method has substantial advantage over the paper-based payments as well.

Bangladesh Bank has recently allowed offering Mobile based Banking services to some 11 scheduled banks. After getting some more proposals, BB has decided to put a uniform guideline for this.

Currently in our country we have proprietary ATM/PoS switches of individual banks. BB has taken initiative to streamline these services by introducing a common SWITCH for ATM/PoS, when implemented this will ensure the interoperability of these payment services and will also create a platform to offer internet based transactions and e-commerce in the country. This system is expected to be operational within next year.

Concerns have been raised regarding the security of e-payments and most of these stem from the fear of having confidential and payment related information compromised. Identity theft is a common phenomenon in advanced countries and this has cast some doubts on the security of electronic payments. I would like to assure that, we have adopted the latest security techniques like encryption, PKI infrastructure and Digital Signature in the payment systems we operate and are planning to implement. Having these securities in place it is literally impossible for any unauthorized person to manipulate payment data. However, banks participating and offering e-payment services to their clients through internet or mobile phone will have to take reasonable measures to ensure safety and security of their channels.

BB has already drafted a Payment systems Act, which will be sent shortly to the concern ministry for enactment. BB has adopted payment and settlement Systems Regulation in the year 2009. The BACPS and BEFTN Operating Rules have also been published. Other relevant guidelines/system rules will be published well before the systems come into operation. These Operating Rules define the parameters of the relationship between the parties, and identify processing requirements for specific application(s), and establish liability and accountability for procedures related to that application.

Electronic payments have clear advantage over paper-based payments and a country like ours is badly in need to adopt these sorts of payment mechanism urgently. In the USA alone, electronic payments are used by more than 20,000 Financial Institutions, 4.5 Million corporations and 135 Million consumers. The number of e-payment transactions in exceeded 19.40 Billion in 2010 with a value of nearly 32 Trillion Dollar. Electronic Payment Systems introduced by Bangladesh Bank coincides with Bangladesh Government's initiative of making DIGITAL Bangladesh. Regardless of any issue, electronic payments are here to stay.


E-Banking and Mobile Commerce*

E-banking and mobile commerce, the subjects that resonate with two objectives at the forefront of our current priorities, viz., 'digital Bangladesh' and financial inclusion for inclusive growth. At the underserved end of our financial markets, mobile phone based e-banking is clearly the way forward in cost effectively extending financial services to multitude of people of small means and their micro and small scale farm and non-farm productive enterprises in dispersed remote locations. At the better served urban clientele end, internet and mobile phones have opened up new avenues for e-commerce transactions avoiding crowded shopping mall aisles and queues. Mobile telephony has spread very fast throughout Bangladesh, in number nearly covering the entire adult population (75 million).

Over years Bangladesh Bank (BB), commercial banks and other participants in the local financial market have been investing heavily in putting in place the required IT infrastructure for mobile phone, smart-card, PC based e-banking transactions, installing inter alia automated clearing and settlement of inter-bank electronic transactions and transfers. Receipt and delivery of inward remittances from workers abroad are now largely electronic, and the electronic mode has made large inroads also in payments of utility bills etc. Use of credit and debit cards for e-payment at vendor site POS terminals is spreading steadily. Mobile phone and/or smart-card based online purchases of goods and services are catching on in popularity, with growing hassles from traffic snarls and jams in physical visits to vendor outlets in cities. Over the near and medium term, besides routine periodic local payments like salaries, pensions, social safety net grants and input subsidies for farmers, we are looking forward to mobile phone based deposit, lending and loan recovery services in rural areas, through appointed local area agents of banks. Such a mobile banking has already been initiated by one private sector bank, to be followed very soon by another. A number of banks has already started various mobile payment services. You have heard, Trust Bank has also launched its mobile banking products. And some are in the queue.

*3rd International E-banking and Mobile Commerce Conference and Exhibition, 15 June 2011.


Bangladesh Bank, a facilitating regulator, is actively encouraging engagement of banks, micro-finance institutions and mobile phone and/or smart-card IT platforms in partnerships innovating financial service delivery models responding to the diversity of existing and emerging new needs in the fast developing market. New bank-led e-payment transaction and settlement platforms developed in such initiatives will require unrestricted access to all mobile phone networks for fast attainment of scale needed for viable operation. There are reports of difficulties experienced by newly developing bank-led e-payment platforms in getting access to mobile phone networks. Mobile phone operators stand to gain from allowing the new e-payment platforms unrestricted use of their mobile phone networks, by way of new income from increased usage of their capacities. We would like to see the issue sorted out promptly to mutual satisfaction of both sides. To be more specific the issue of interoperability should be resolved as soon as possible. I would like to make a special request to BTRC Chairman to use his good office to address this issue at the earliest. This indeed will lead to a win-win outcome for all parties involved.

Given the prevalent enthusiasm and onset of rapid strides in embracing e-banking and mobile commerce, Bangladesh is an excellent choice as venue for the international conference and exhibition. I heartily congratulate the SAARC Chamber of Commerce and Industries (CCI) for this choice. I hope and believe that participating and visiting banks, mobile phone/smart card IT platforms, ancillary hardware and software providers will find the conference and the exhibition fertile grounds as much for new ideas as for new business avenues.


*Inauguration of Bangladesh Bank's online CIB services, 19 July 2011.

Bangladesh Bank Online CIB Services*

With today's commissioning of online CIB services, banks and financial institutions will furnish credit information to CIB database online from their own sites instead of physical transfers in CDs; and they will also access credit reports from CIB online at their own sites instead of the time consuming process of applying for and obtaining reports printed on paper. I see this as a watershed event for our financial sector and its real sector clients in businesses and households, substantially quickening loan application processing and disposal. Efficiency gains from this introduction of online credit information services are the kinds of benefits we are looking forward to from our government's vision of Digital Bangladesh.

Implementation of the online CIB services has required untiring well coordinated work for several months at BB and at the banks and financial institutions; involving putting in place secure online connectivity, the new data collection and processing platform at CIB in BB, installation of necessary hardware and software at user sites in banks and financial institutions, staff training and repeated system trials at CIB and at the user sites till removal of all likely glitches.

The newly established automated CIB will provide credit related information for prospective and existing borrowers including credit history of last two years. Once the enquiry information is submitted to the system by the bank and financial institution, CIB report will be automatically generated within five seconds and delivered subsequently.

I congratulate the teams in BB and in the banks and financial institutions involved in this challenging but exciting task. We are grateful to IFC office at Dhaka for their valuable contribution in expertise as the Project Management Unit, and to the DFID for the UK Government's grant assistance covering the costs of this project. BB is fully committed to promoting automation in our financial sector to promote faster, more efficient delivery of financial services to all customer segments including the rural and urban poor. To this end, our major other recent initiatives include automated clearing and settlement of both paper


based and electronic fund transfers, and bank led mobile-phone based payment and banking services.

There are of course lots more to be done, and BB will be happy to encourage and support initiatives of financial service providers in Bangladesh in innovating new cost-effective service delivery modes responding to emerging needs of their diverse customer segments; and I believe DFID, IFC and other external development partners will continue to be as supportive in such initiatives as they have thus far been.


* Seminar on Enterprise ICT Security, 15 October 2011.

Enterprise ICT Security*

Data and transaction security is of paramount importance in this era of rapidly expanding commercial and government computer networks and the emerging electronic economy. The inherent challenges of the security issues have become a top priority in every business that makes use of information technology. You just heard from the Keynote Speaker Ms. Gun how the security risks too are expanding cyber attacks threats. Data loss due to malware attack, security is crucial, protecting customers from future threats.

Bangladesh Bank, being the monetary authority of the country, is at the forefront of government`s firm commitment to be digitized. We have already formulated a 5-year strategic plan for the financial sector based on advanced technological applications to deliver services with utmost efficiency. The ultimate goal is to make Bangladesh Bank a world class Central Bank with high applications of technologies. This should, in fact, transform itself into a paperless organization within this plan period.

Bangladesh Bank has taken the lead position in encouraging and implementing IT based technologies in overall banking sector. The implementation of Bangladesh Automated Cheque Processing System (BACPS), Bangladesh Electronic Fund Transfer Network (BEFTN), Enterprise Resources Planning (ERP), CIB online facilities, Mobile Banking Service are worth mentioning. Establishment of the Data Warehouse facilities, adoption of core banking software within the Bangladesh Bank is going to be on live soon. Establishment of National Payment Switch (NPS), which is on process, will be a Big Bang for the whole payment systems. Bangladesh Bank has achieved a historic milestone in trade and business arena, departing from conventional banking with the introduction of e-commerce recently, a giant stride towards digital Bangladesh. These are only a few examples of how fast the Bangladesh Bank is progressing in the process of digitization of its activities. In addition, it is also taking other banks and government agencies on board to ensure speedy, credible, user-friendly financial services to all. Indeed, consumerization of IT services is taking place at a high speed.


All these initiatives of Bangladesh Bank and the dedications of the commercial banks have led us to faster adoption of IT based technologies in the financial sector which has been resulting in increased use of Core Banking Software, online banking and so many other IT based banking services in the commercial banks. This is not only digitalizing the whole banking sector but also opening up a large window of benefits to all the citizens of Bangladesh. But we must not forget that the IT risk issues like viruses, hackers, natural disasters, operational errors, fraudulent activities etc. may accompany with the benefits of these technologies. So our responsibilities will not end in only adopting the IT based technology, we need to ensure the adoption of safety measures as well. I am sure today`s seminar must have raised enough consciousness for increased security measures in the IT based financial services.

As the Governor of Bangladesh Bank I feel that all of our consciousness and dedications towards sound digitalized banking sector can help us overcome these types of risks. Our devotion should be towards making proactive analysis of the consequences and counter-measures against security breaches in relation to risks; creating a carefully planned implementation strategy for integrating security measures in all aspects of our banking network. All these are extremely important in this era of digitization, e-Commerce, e-Governance and online transaction. Ihope, the affirmed ICT security for the banking and financial sector of the country will help us move faster than before.


*Launching ceremony of Online Payment Gateway 'AlertPay' and Mobile Banking Service 'Express Cash' of Bank Asia Ltd., 15 March 2012.

Online Payment Gateway*

Bangladesh Bank is working continuously to develop a modern information technology based efficient and secured banking system with a view to increasing stability in the financial sector. We have already introduced multifarious system including online banking, e-commerce, Automated Clearing House, Bangladesh Electronic Fund Transfer Network (BEFTN), online CIB service, bank-led mobile banking service, new services in the Information Technology (IT) sector especially outsourcing facility and liberalization of foreign exchange transaction system.

Recently, Bangladesh has been identified as the most potential country for IT services in a research report of the KPMG, an international organization concerned with financial audit. Due to present increase of business expenditure of the IT developed countries especially in India and Philippines, as an alternative country Bangladesh is considered as the most potential country in this sector in the world. Apart from this, in Bangladesh number of English knowing diligent young people who are expert in information technology is increasing substantially day by day. Above all, the capacity of Bangladesh to forward through competition with other countries has been increased significantly. Considering all these factors, we have already withdrawn the restrictions which halt expanding IT business. There is no way to deny that we are very careful to create a business-friendly 'Regulatory Regime'. Due to unprecedented expansion of IT, we have already issued necessary directions and guidelines (F.E. circular no. 6 dated 11 May 2012) to facilitate our resident people to bring foreign exchange earned against exporting Business Processes Outsourcing (BPO) services to abroad through using internet. Consequently, any person or institution can bring any amount of foreign exchange earned against exporting BPO services through Authorized Dealers (ADs).

Besides, Online Payment Gateway Service Provider (OPGSP) plays a very significant role as a medium of bringing small amount of foreign exchange earned against services provided by free-lancer. That is why, we have issued necessary directions (F.E. circular no.15 dated 7 August 2011) to the ADs to take help from the OPGSP to bring small amount of foreign exchange at low cost earned against exporting IT services. Initially, at best 500 Dollar can be brought through the


OPGSP. But if necessary, we will consider extending this limit on observation of real income flow.

There are other service exports such as business services, professional/research and advisory services etc. rendered from Bangladesh against which payments in foreign exchange are received through ADs. Along with these services ADs have been given necessary directions (F.E. circular no. 3 dated 22 February 2012) to bring foreign exchange earned against exporting non-agency services. Up to fifty percent (50%) of export proceeds earned from service sector can be preserved in the Exporter's Retention Quota (ERQ) account in foreign exchange. Foreign exchange reserved in this easily exchangeable ERQ account can be freely sent to abroad to meet business expenditure of the concerned exporter and international credit card may also be accepted against the balance. This credit card can be used to meet other necessary expenses. I hope all these initiatives of liberalizing foreign exchange transactions will create opportunity in bringing foreign exchange without any hassle earned against exporting services and help to create business-friendly environment in exporting services. As a result, exporters will be encouraged in exporting other services along with information services.


*Seminar on 'IT Security in today's Global Banking', organized by Bankers' CTO Forum, IBM and TISL, 5 July 2012.

IT Security and Global Banking*

I believe the seminar on ' IT Security in today's Global Banking' is a timely event given growing importance of data and transaction security in the wake of fast expanding commercial & government computer networks and emerging connected economy. The inherent challenges of the security issues are increasingly becoming strategically important in the backdrop of widespread use of information technology in the banking sector.

You are informed about our national vision of becoming "Digital Bangladesh" by 2021. In conformity, we have also declared our vision of becoming "Digital Bangladesh Bank" and we are working hard accordingly for attaining this vision. Within a short period of time, Bangladesh Bank has successfully implemented noticeable projects like Networking, ERP, Banking, EDW, BACH, BEFTN, NPS, CIB Online etc. Besides, we have introduced e-recruitment process from 2009 which is significantly saving time and costs associated with application process benefiting the applicants as well as the organization as a whole.

You all are aware of that Bangladesh Banks' initiative to implement e-tendering system from 2010 by which tendering procedure becomes transparent and faster. Among government and semi-government organizations BB is the first and pioneer in this type of initiatives. It is also mentionable that BB's online foreign trade monitoring system (export, import, remittance etc.) has eliminated reporting time and increase the efficiency and transparency in the said areas. Using this software banks and their AD branches are also monitoring their own foreign trade.

Bangladesh Bank is well aware of ICT security and accordingly has implemented Secured Socket Layer (SSL) certificates to ensure greater ICT security. BB has its own ICT Security Policy which is being implemented and monitored properly. Besides, BB has issued ICT Security Guideline for Banks and Financial Institutions to ensure secure use of ICT. To cover the latest developments in ICT and newly implemented delivery channels such as internet banking, mobile banking, ATM, POS etc, this guideline has been updated in early


2010. These initiatives of Bangladesh Bank have helped make faster and more secure financial transactions. You will be happy to know that 37 out of 47 banks have become fully online and I hope the rests will join soon. I would like to thank all banks in implementing our national vision of Digital Bangladesh.

I appreciate the efforts of Bankers' CTO Forum in arranging such seminars on ICT security. Though this is a specialized seminar for banks, we also must have a generalized idea about the ICT security needed for most of the enterprises. We should address these risks for gaining detailed understanding of potential environmental risks, for formulation of policies and for integration of security measures into all aspects of our banking network. All these are important in this era of digitization, e-Commerce, e-governance and online transactions.


*'4th International Banking and Mobile Commerce Conference', organized by TOTAL Communications & Bankers' CTO Forum, 9 July 2012.

Banking and Mobile Commerce*

E-banking is increasingly becoming a norm of providing financial services in the developed economies, and is also being widely practiced in the developing economies. This brings enormous benefits to banks and customers. For banks, e-banking is a cost-effective mode of offering financial services and developing innovative financial products customized to individual needs while for customers, it provides them with greater options in conducting their businesses and meeting daily needs.

Evolution of electronic banking started with the use of automatic teller machines (ATMs) and has included telephone banking, direct bill payments, electronic fund transfer and online banking. Many forecast that online banking will continue to be the most popular method for future electronic financial transactions. On the other hand, Mobile Banking refers to provision and availability of banking and financial services with the help of mobile telecommunication devices. The scope of offered services may include banking transactions, administering of accounts and access to customized information.

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 financial services. Bangladesh Bank (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 and you know that BB has already issued guidelines for mobile financial services to facilitate mobile banking in Bangladesh. Ours is a bank led model where only banks are allowed to lead the mobile financial services. This model is offering an alternative to conventional branch-based banking to the customers through appointed agents being facilitated by the MNOs/Solution Providers instead of bank branches or through bank employees. Agent banking with bio-metric security measures and the use of high end mobile phones are expected to be launched soon in Bangladesh. This bank-led model will add new dimension to the mobile financial services.


E-Commerce Activities in Bangladesh:

Bangladesh Bank issued a circular in November 2009 stating specific e-commerce operations which can be offered by the scheduled commercial banks of Bangladesh such as:

1. Online payment of utility bills from client's accounts to recipient's accounts.

2. Money transfers from one account of a client to his/her another account in the same bank.

3. Payment/collection of money from/to buyer's bank account to seller's bank account for purchase/sale of products under e-commerce system.

4. Transaction via internet using credit cards in local currency.

Besides, customers of the same bank can transfer money to each other's account up to Taka half a million maintaining Money Laundering prevention Act and other related circulars. E-commerce is expanding fast in Bangladesh with regulatory support from the central bank. Some of the e-commerce sites include: ekhoni.com, clickbd.com, ajkerdeal.com, iferi.com, meenabazar.com.bd and etc.

M-Commerce in Bangladesh:

Bangladesh Bank has issued NOC to three mobile operators (Grameenphone, Banglalink and Citycell) to sell railway tickets through mobile phones. Besides, Grameenphone was allowed to sell international cricket match tickets arranged domestically by Bangladesh Cricket Board (BCB).

Our Achievements:

Out of 47 banks operating in Bangladesh, 37 banks have become fully online, 4 are partially online and 6 are in the process of becoming online. So, around 79.0 percent banks in Bangladesh are offering online banking services.

As of June 2012, 23 banks have got NOC from Bangladesh Bank to introduce Mobile Financial Services in the country and among those, 14 banks have already launched their services. These services include disbursement of inward foreign remittances, person to business (Utility Bill Payments), business to person (Salary Disbursement), person to person, government to person (allowances like freedom fighter allowance), person to government payment (tax payment) etc. Around 0.7 million mobile accounts have already been opened under Mobile Financial Services and transaction volume amounts to Taka 7.13 billion up to May 2012. Mobile companies operating in Bangladesh are collecting utility bills through their outlets. The number of the collection is around half a million per month on an average. They are also selling railway tickets averaging around 12,000 per month.

You know that Bangladesh Bank has introduced fully automated clearing and settlement of interbank paper based and electronic fund transfers which is hugely facilitating branch based, and mobile phone/smart card based banking. Presently 85-90 thousand cheques are being cleared through Bangladesh Automated Cheque Processing System (BACPS) which is about 95 percent of total cheques cleared through the banking process. Around 18,000-20,000 electronic


fund transfer transactions are being processed per day through Bangladesh Automated Clearing House (BACH).

Besides, Bangladesh Bank has allowed online transactions for the country's ICT firms helping them expedite ICT related businesses. Under the new provision, banks have been allowed to remit up to USD 10,000 in a calendar year from the Exporter's Retention Quota (ERQ) account on behalf of ICT or software firms for the purposes of software registration fee, domain registration and hosting fees and server maintenance fee without prior approval of the Bangladesh Bank. Bangladesh Bank has also issued circular on inward remittances to provide Business Process Outsourcing (BPO) services. Very soon, we will launch National Payment Switch (NPS) which will help develop e-commerce even faster with electronic clearance of all financial transactions.

If we can continue this momentum, the dream of transforming our beloved nation into 'Digital Bangladesh' will not be far away, at least in the field of banking sector of Bangladesh.


*Celebration Ceremony of the 2nd Anniversary of Bangladesh Automated Clearing House (BACH), 7 October 2012.

Bangladesh Automated Clearing House*

It's a very delightful moment indeed. Two years back Bangladesh Automated Clearing House (BACH ) successfully commenced its journey on this day. From the bottom of my heart I would like to welcome as well as congratulate you all on this auspicious occasion of the 2nd Anniversary of graceful journey of BACH.

Promoting and monitoring the Payments Settlement systems is one of the major functions of all the central banks worldwide. Besides this function Bangladesh Bank has been performing the role of payment system operator sincerely and very efficiently. Since the early 90's Bangladesh Bank started upgrading country's clearing system by applying computer technologies. But the semi- automated clearing system was also getting back-dated to meet the prompt settlement of the rapidly expanding businesses transactions. Considering this, Bangladesh Bank has taken the timely initiatives to modernize the country's payment system. BACH is the outcome of such endeavour.

With the financial support of British Government, Bangladesh Bank under the umbrella of Remittance and Payment Partnership project has implemented a modernized Clearing System. Commencing from the last quarter of 2006, the project implementation phase was up to March 2011.

Bangladesh Automated Cheque Processing System (BACPS), implemented under this project, is not only unique in this region but also a role-model of inter-bank cheque clearing system for any other countries of the world. The Previous Semi-Automated cheque clearing system has been transformed to the state-of-the art image exchange topology. Using this system it is possible to clear and settle inter-regional cheques within the day whereas, in the previous system, it took minimum seven days to a month to clear the same. Now the previous Same day Clearing which cleared the TK five lac and above valued cheques of Dilkusha and Motijheel commercial areas bank branches only has been expanded throughout the country under High Value session. High value session clears cheques very promptly and enable the customer to en-cash the same within that


business date. This has brought tremendous speed in inter -bank business transaction. High value transactions have been increased about five times, than that of earlier one, which indicates the acceptance of the system by the business community. Now it is well recognized that the banks, the business community and all the people of the country have been highly benefited from our sophisticated payment mechanism.

Besides modernizing the cheque clearing system, Bangladesh Bank has also implemented Electronic Funds Transfer (EFT) System as a mechanism of inter-bank payment and settlement for the first time ever in the country. In this system customers are enjoying transactions in prompt, safe and cost saving manners. EFT can be very effective for payment of salaries, allowances, dividend and IPO refunds, utility bills, insurance premiums, domestic money transfers etc. under batch processing system. EFT started with average of eighteen transactions per day whereas, now it has turned to an average of 25,000 transactions per day and I strongly believe this number will rise beyond our expectation in coming days. On a single occasion it jumped up to 100,000 transactions a day. This paperless electronic payment mechanism can better be called green payment system. I urge all business community to use EFT mechanism for the business transaction and grab the maximum benefit from it.

The job of implementing BACH, the most modern payment systems, in a county like Bangladesh having 47 banks of different standards, size and ownership was not an easy task at all. A dedicated team of Bangladesh Bank rendered their heartiest efforts for implementing this. With the help of reputed payment systems experts from abroad we chalked out the ACH work plan and closely monitored the implementation process. All the commercial banks prepared themselves for taking part in it. Printing of MICR cheque, installation of required hardware and software, establishment of secured communication link and testing with the central bank clearing systems were challenging in true sense. To achieve the ultimate goal Bangladesh Bank, BACH's vendor, all the scheduled banks and their vendors have worked hard day and night. I express my heartiest gratitude, thanks and congratulations to all who have participated in implementing this gigantic task. I would also like to thank British Govt. for their support in implementation BACH and also the three executive directors of Bangladesh Bank for their dedicated services as RPP Project Director.

To cope with the changes of time, our banking sector is embracing new technologies very promptly. Bangladesh Automated Clearing House is a great achievement for the banking sector of Bangladesh which should also be treated as a milestone in achieving the dream of "Digital Bangladesh" of the government.

In last few years, Bangladesh Bank has increased the use of information technologies in its day to day works. Initiatives have been taken to automate specially those activities which are directly related to customer services. E-Tendering, Online CIB and Automated Clearing House are the major ones of them. Besides, to facilitate and encourage online payments, 'National Payment Switch' (NPS) establishment process is ongoing. On the other hand, all the internal operations of Bangladesh Bank is under the automation procedures of which Core Banking, Enterprise Resource Planning (ERP) and Data Warehouse are worth mentioning.


I am to mention here that the state owned banks are still in lagging behind adopting modern technologies. There is no alternative other than adopting modern technologies to ensure transparency and to sustain in the most competitive banking environment. Unless these banks come forward to embrace the modern technologies, the economy will not be able to optimize benefits of technologies.


*Seminar on Role of IT in 21st Century Banking, 25 May 2013, Dhaka

Role of IT in Banking Services*

I am sure you are all aware of the fact that Information Technology has important role in promoting faster and safer interconnectivities of businesses within and across borders. The inherent challenges of defining its efficient role in banking services are also becoming clear to the institutions that are making deeper use of information technology.

All of you are well-informed about the Government's vision of achieving 'Digital Bangladesh' by 2021. Accordingly, we declared our vision 'Digital Bangladesh Bank' and now we are working actively for attaining comprehensive digitization and optimized financial processes. Bangladesh Bank is a leader in introdusing information technological during the last few years. Introduction of automated clearing house, online CIB report, electronic fund transfer, automated payments system, online banking, mobile banking, e-commerce, online payments gateway, forex transaction dashboard, are a few of the recent initiatives taken by Bangladesh Bank. The National Payment Switch has already been put in place and expected to start its fuller operation soon. The preliminary outcomes of this digitization drive are indeed encouraging.

The issue of Financial Inclusion is, of course, the order of the day globally. Bangladesh Bank, as the central bank of the country has launched a comprehensive financial inclusion campaign to reach out to the hitherto un-served and underserved population segments and economic sectors with desirable financial services. Motivated by Corporate Social Responsibility (CSR) obligations, banks have also enthusiastically engaged themselves in the financial inclusion campaign, innovating cost effective service delivery modes to reach new customer segments. These initiatives have been supported by developments in IT infrastructure with nationwide connectivity for online banking, with introduction of mobile phone-based banking, and with fully automated inter-bank clearing and settlement of both paper based and electronic fund transfers. Financial inclusion initiatives in Bangladesh include extending branch and ATM


networks into rural areas, mass opening of no-frills bank accounts with nominal deposits for poorer people, adopting new cost saving remote delivery modes for financial services like mobile phone and smart card based banking, enhancing financial literacy and awareness drives, introduction of school banking, enhanced agricultural and SME financing, and financing schemes for renewable energy generation projects. BB has supported these initiatives by putting in place necessary enabling infrastructure, including a fully automated interbank clearing and settlement platform for paper based and electronic payment instruments, an upgraded online credit information bureau, and some refinance lines for banks against their SME and environment focused lending. I feel confident that the emphasis which we have put on financial inclusion, particularly the IT based ones, will finally lead to stronger financial stability in Bangladesh.

It is indeed a great pleasure for me to see that Bankers' CTO Forum started its journey in the context of Bangladesh Bank's aggressive move towards automation despite some common challenges in implementation process motivated by strong will and determination. I am certainly very happy to see this emerging as a formal 'Forum' for all IT professionals across the country.

Although use of IT in banks makes our life easy but let us not forget the risk of IT related hazards as well. We must also address these challenges by gaining a detailed understanding of the potential IT related risks (for example, viruses, hacking, IT intrusion, and natural disasters). Therefore, sufficient safeguard systems must be in place to make analysis of the consequences and hence to take necessary countermeasures against security breaches in relation to risks; formulating policies and creating a carefully planned implementation strategy for integrating security measures into all aspects of our banking network. All these are extremely important in this era of digitization, e-Commerce, e-Governance and online transactions. I hope all these issues will be addressed in this timely workshop.

You know, arranging seminar, drafting a project plan does not ensure that we are secured unless we implement the IT Business processes along with required safety measures. As we widen the use of Information Technology in our businesses, it is also important for us to implement security policies phase by phase and consider significant investment for strengthening IT infrastructure for secured business.


Problem and Prospects of Apps Development in Bangladesh*

This seminar is of immense importance at a time when Freelancers are gradually emerging as important foreign exchange earners for Bangladesh. And quite naturally, they deserve our attention and full support. Freelancing is becoming popular and we need to provide better environment in terms of technology infrastructure and framework for remittance inflow for the young energetic, self-employed, skilled workforce of the country.

I came to know that not only individual freelancers but also big IT companies of Bangladesh are engaged in application software development for the world leaders in this field. This would not have been possible without our collective effort. While ICT Ministry has been mainstreaming ICT in all areas of governable and laying infrastructure for creating skilled entrepreneurs, the central bank has similarly providing regulatory space for hassle free inflows by easing foreign exchange regulation and encouraging banks to become digital in conducting all types of transaction. It is true that Bangladeshi freelancers and ICT companies often face difficulties in availing uninterrupted electricity, adequate internet bandwidth and smooth online payment network for smooth remittance inflow. Mitigating all these issues is not an easy task.

Today we have had many suggestions and recommendations forms experts and I strongly believe that if we work together these challenges can surely be addressed. I expect that in near future outsourcing including apps development will contribute significantly in our incoming remittance. Government is working to improve power supply; BTRC has already deployed two companies for WiMAX broadband internet connectivity and recently planned to permit more WiMAX broadband internet service providers. Intranet bandwidth service charges have been reduced (15-35%) since April 2013 by BTCL.

We are aware of the fact that Freelancers are still problems in receiving their earnings from abroad. Bangladesh Bank has already taken necessary measures to invite online payment networks to work in Bangladesh such as Payza, PayPal etc. Freelancers can now receive up to US$2,000 per transaction from abroad against their services. Bangladesh Bank has just issued a circular to purchase goods and

*Seminar on "Apps Development: Challenges and Opportunities" 2 June, 2013, organized by Ministry of ICT


services through online amounting US$1,000 per year. In addition to unspent travel quota, each transaction will have to be less than $100. The Authorized Dealer will facilitate the use of International Credit Card for settling these transactions. We have allowed Virtual Credit Card system to pay fees for TOEFL, SAT etc. for those students who may not have access to ICC. We are prepared to bring similar innovations for freelancers as well if there is adequate demand for it.

In particular, the younger generation will get the maximum benefit out of this arrangement. Payza started its journey in Bangladesh in partnership with Bank Asia. Other bank customers can also enjoy Payza service through EFTN. Bangladesh Bank has been trying to establish necessary partnership with PayPal to start their operation in Bangladesh. If required, Bangladesh Bank is ready to come up with necessary changes in Foreign Exchange Related circulars to accommodate requirements of PayPal and other leading online payment network service providers. We have already informed PayPal about our interest when they visited us. The ICT ministry and relevant stakeholders may like to further pursue this matter with PayPal, if they like to do so.

You are well aware about the vision 'Digital Bangladesh by 2021'. Accordingly, we declared our vision "Digital Bangladesh Bank". Within the shortest possible time Bangladesh Bank successfully implemented mentionable mission-critical projects like Clearing System (BACH, BEFTN) Credit Information Bureau (CIB), Data Warehouse (EDW) and Payment Switch (NPS). In Bangladesh, we have also started it successfully through Mobile Banking. Mobile application market developed and relevant skill development for application developers need to be on the top of the agenda of our policymakers.

EEF support may be extended to these entrepreneurs. We are also working with DCCI to provide financial support to young entrepreneurs. The proposal for developing smart phone applications to provide Govt. and other public services in local language should also be taken seriously by the policymaker. Currently, Bangladesh Bank is working on Agent Banking model through biometric POS devices. This will enable us to implement Financial Inclusion regardless of mobile phone user.

On the whole, the Central Bank as a regulator is prepared to walk an extra mile for improving the pace of digitization in the financial sector.

PART SEVEN Bangladesh Economy


Present Economic Outlook and Challenges Facing Bangladesh Economy*

As we all know, financial markets and institutions in Bangladesh remained free of the toxic assets and contagion afflicting the global financial markets over the past couple of years, because of the limited, regulated external exposure of our economy.

Unlike most other economies in the region and elsewhere, economic growth in Bangladesh has thus far been only mildly impacted by the ongoing global slowdown, attaining 5.9 percent real GDP growth in FY 09 following the 6.2 percent growth of FY 08. Foreign exchange reserve is more than USD 7.04 billion even after ACU adjustment. Inward remittances is recorded at USD 9.7 billion (end June 2009) and exports continue to post double digit growth. The government's somewhat conservative 5.5-6.00 percent growth projection for FY 10 takes into account the risk of the current global downturn being prolonged. We have indicated some of these risks and as well as policy responses to such risks in our latest Monetary Policy Statement (July-December 2009) which is proactive as well as accommodative. Incipient signs of global recovery appear however to be taking hold; global stock prices have recouped much of the losses incurred at the height of the crisis, and some of the troubled large US financial institutions are already able and willing to pay back the bailout money they drew earlier.

If the clouds in the external sector continue to clear up at the current pace, and if domestic conditions continue to remain benign, I would expect Bangladesh economy to outperform the official FY 10 projection to attain growth close to FY 09 level. In this more upbeat growth expectation I see challenges to policy makers and entrepreneurs in Bangladesh in two main dimensions.

The first of these is our by now familiar Achilles heel of infrastructure growth trailing way behind the growth aspirations of the rest of the real economy, dampening investment initiatives and slowing down output activities. For rapid substantive progress in this area, I would expect and urge the American Chamber and other investors' forums like yours to join hands with the government enthusiastically in the public private partnership (PPP) program announced in the

* 'Present Economic Outlook and Challenges Facing Bangladesh Economy', 21 July 2009.


FY 10 budget. We will certainly facilitate this process of PPP implementation with all the needed support.

Now the challenge is how to devise rules and norms for desired institutional mechanism to initiate the implementation process. As infrastructure projects typically involve longer gestation periods we indeed have no time to waste, and we must leverage the capabilities and strengths of the private and public sectors as fast as possible to attain the best synergies in expanding our physical infrastructure on which the SMEs and others can install the superstructures of their diverse output activities. The second dimension of challenge is about the quality rather than the quantity of growth, in particular about inclusiveness and environmental sustainability. To be on a just and stable base, our growth efforts must spread benefits across all social groups and regions, and not worsen inequality further by neglecting the indigent. Although social justice and equality are issues primarily for public policy, CSR programs of businesses can go a long way in reducing deprivation and widening the access of rural and urban poor to basic social and financial services necessary for healthy, enlightened and productive life. The current rudimentary CSR practices of financial and non-financial businesses in Bangladesh are limited essentially to passive charitable giveaways; proactive engagement in design and implementation of the action programs could have substantially strengthened and expanded the impact of their CSR budgets. In particular, CSR programs of businesses can bridge the market failures and market gaps that limit the access of the poor to the services necessary for their well-being. For example, despite rapid steady expansion of bank credit, the large majority of the rural and urban poor in Bangladesh still remain largely excluded from access to basic financial services. A migrant rural laborer working in a city is hard put to find a quick and affordable way of sending money regularly from his/her meager income for subsistence of dependents in a rural outreach; and private sector banks are still to be spontaneous in extending loans to rural households for on-farm/off-farm productive activities. They, however, are now changing gears in the light of the added emphasis being given by Bangladesh Bank on this aspect. Financial inclusion, i.e., bridging these market gaps and failures in financial services to the rural and urban poor should be a high priority in CSR programs of banks; they can engage in creative collaboration with IT based telecommunication service providers to design arrangements for remote delivery and recovery of credit in rural locations using text/voice messages, to avoid the high costs involved in branch based service delivery. There are outside examples of such initiatives worth emulating, some of these supported by philanthropic organizations of American businesses and individuals.

Our growth efforts must also be environmentally responsible; where possible improving, and at least not further worsening the ecosystem for our current and future generations. CSR programs of businesses in Bangladesh should initiate steps for measuring and tracking the ecological footprints of their activities, aiming over the medium term at what has come to be known as carbon neutrality. Here again, many very good examples are available in CSR practices of businesses in America and Europe. I wish to take this opportunity to urge foreign investors' chambers like yours to set up your own local examples of such initiatives, and also to support and mentor similar initiatives of businesses owned by Bangladeshis. Bangladesh Bank has, of course, started guiding the banking


sector to become more inclusive (e.g. via enhanced agricultural and SME lending) and environmentally responsive (e.g. via refinancing new loan products on solar energy, bio-gas, effluent treatment plant etc). We have just declared the agricultural credit policy. We are now working hard to devise an effective action and monitoring plan to ensure that farmers, including share croppers, fishermen, livestock and poultry entrepreneurs get the loans in time without any hassle. The central bank has also been encouraging more inclusive remittance payment system and women-entrepreneur-friendly investment. It has already implemented a number of smaller PPP projects on electricity production. Interesting lessons have been learnt from these experimentations, some of which are worth replicating. The recently published monetary policy of BB has also been designed as pro-poor growth augmenting, besides being focused on core areas of price and financial system stabilities.

Before concluding I would like to mention that while actively engaging with the government and the private sector in full support of our growth aspirations, Bangladesh Bank will continue its vigilance about maintaining macro-financial stability as the needed policy infrastructure underpinning sustained stable economic growth.


Strengthening Remittance Flows and Impact: Policies, Practice and Prospects*

For some years now, remittance inflows from migrant workers abroad have been playing a major role in underpinning external sector viability of balance of payments of Bangladesh. Rising steadily, annual inflows have grown nearly four-fold between FY 02 and FY 09 (from USD 2.5 billion in FY 02 to USD 9.7 billion in FY 09); during this period ODA inflows net of amortization have stagnated around an average of about USD 1.0 billion annually. Contrary to apprehensions, workers' remittance inflows to Bangladesh grew buoyantly during the global financial turmoil (by 32.4 and 22.4 percent respectively in FY 08 and FY 09). Bangladeshi migrant workers largely in low-skilled jobs did not suffer as extensive job losses in host markets abroad as initially feared, and much of the increased inflows during this period are presumably transfers of their savings from the turmoil ridden unstable financial markets in host countries to the safety and familiarity of stable environment prevailing in financial markets in Bangladesh.

The growing remittance inflows have been highly beneficial for Bangladesh in upholding domestic demand in the recessionary global environment, in enhancing availability of borrowing resources for both the government and the private sector, and in augmenting foreign exchange reserve cushion for coping with the uncertainties of the fragile, unstable external environment.

Rising labor migration and the attendant high remittance inflows are not altogether unmixed blessings however, they pose some challenges in macroeconomic management that require careful handling. The main challenges and the approaches adopted in Bangladesh in addressing them are enumerated briefly below.

The high remittance inflows have created a liquidity overhang in the domestic financial markets; with only partial immediate use of the inflows in productive investment activities in the backdrop of the recessionary global environment (weakness in new investment activities and capital goods imports seen in FY 09 is yet to show a significant turnaround). The excess liquidity has tended to spill into speculative outlays in real estate and other asset markets, creating bubble like asset price pressures. Extensive recourse to sterilization of the excess liquidity

* Seminar on 'Strengthening Remittance Flows and Impact: Policies, Practice and Prospects' organized by WB/IMF at Istanbul Congress Center, 4 October 2009.


with issues of treasury/central bank securities, besides being costly, is problematic in the current situation in that it risks dampening further the already weak investment initiatives by way of hike in market interest rates.

In the immediate term, fiscal policies of the Government of Bangladesh (GOB) have provided various incentive measures to stimulate real sector investments, including specific supports to sectors affected by the global downturn, public-private partnership initiatives in infrastructure investments and support for microfinance self-employment initiatives. Treasury bonds in Taka and USD targeted at non-resident Bangladeshis including migrant workers are absorbing part of the remittance inflows in financing fiscal deficit. Bangladesh Bank (BB) has, besides taking limited recourse to mopping up excess liquidity with auctions of 30 day BB Bills, adopted various financial sector policy measures supporting and promoting lending to under-served productive real sectors including agriculture, SMEs, renewable energy and environmental protection. Also, BB has allowed banks larger open exchange positions to permit wider engagement in lending in foreign exchange from their domestic branches and offshore banking units, simultaneously intensifying oversight on their exchange risk management processes.

Over the longer term, strengthening the capacity of domestic financial markets for handling and absorbing large inflows will require deepening of secondary markets in treasury and corporate securities, creating new secondary markets in asset-backed securities, supporting growth of new capital market institutions like venture capital and private equity institutions. Deepening of the local inter-bank foreign exchange market will require adequate availability of hedging tools covering exchange risks of Taka vis-à-vis major convertible currencies, which in turn will require some degree of openness of the Taka money market to non-resident institutional investors. Besides maintaining oversight on solvency, liquidity, asset quality and risk management in the financial sector, BB and the GOB will appropriately phase in regulatory and market development reforms in these directions gradually, as stability and external sector viability consolidates and strengthens further.

The high inflows of workers' remittances into the as yet relatively small and shallow local inter-bank foreign exchange market has created appreciation pressure on exchange rate of Taka, adversely impacting the remittance recipients (families of migrant workers), and exporters already hurt by demand weakness in external markets in recession. As immediate measures to preserve export competitiveness and reasonable incentive for migrant workers sending the remittances, BB has been active in buying up USD funds from the inter-bank market to maintain exchange rate of Taka on a slight undervaluation bias.

The build-up in BB's foreign exchange reserves (USD 9.3 billion as of 24 Sept 2009, against a past low of USD 1.3 billion as of 30 June 2001) resulting from regular purchases in the interbank market has heightened balance sheet risk for BB from appreciation of Taka, entailing higher losses in Taka valuation of the higher reserve balances in foreign exchange. Effectively addressing the challenges associated with appreciation of Taka will require some easing of capital account restrictions on placement/investment of funds abroad by Bangladesh residents, to be considered over the medium term as external sector viability strengthens


sufficiently.

Domestic shortage of skilled manpower, and Dutch disease in remittance beneficiaries typically associated with high manpower exports and high remittance inflows have not emerged as major concerns for Bangladesh. Current demographics of Bangladesh and the country's institutions for general, professional and technical education are providing steady streams of new unskilled and skilled entrants into the labor market well in excess of local requirement; leaving ample room for manpower export without causing domestic shortage. Reports of sample surveys/studies conducted at different times by various domestic and external initiatives about utilization patterns of workers' remittance inflows indicate that while a major part of remittance inflows go into consumption expenses, a substantial part (around 40 percent) is utilized for acquisition of capital assets and/or for financing migration and costs of job acquisition abroad for other family members/relations of the remitting migrant workers.

To sum up, GOB and BB are responding flexibly and creatively in a coordinated way to challenges for macroeconomic policies posed by high inflows of migrant workers' remittances; using these as opportunities for phasing in appropriate regulatory and market development reforms towards bringing about greater breadth, depth and inclusiveness of the financial sector in Bangladesh.


Extreme Poverty Eradication Day*

Endemic extreme poverty involving severe deprivation in food intake, shelter, healthcare and other basic necessities is an affront to decency and human dignity.

The 'extreme poverty eradication day' is a welcome occasion awaking us from complacency to the shocking reality that despite decades of public and private sector interventions supported by ODA and foreign private charities, extreme poverty in Bangladesh remains stubborn, afflicting a quarter of the population. Occasional spells of slow improvement are often followed by backslides in natural calamities pushing vulnerable population groups back into deprivations of extreme poverty.

Even though Bangladesh is a low income country, resource constraints do not seem to be the main reason for slow headway in eradicating extreme poverty.

For quite some years now the annual national budgets have been steadily expanding the social safety net for the poorest, budget support ODA inflows are helping the government in the effort. The major role assumed by the private sector in healthcare and tertiary education for the better off sections of the citizenry has eased demand pressure on public resources on these counts, freeing up budgetary funds for expanding the social safety net, primary education and basic health care for the poorest.

Poverty reduction initiatives of NGOs are being supported on an extensive scale by foreign private sector charities, official overseas development partners and to a modest extent also by the GOB.

Substantial volumes of Zakat and other local private sector charitable contributions are going into helping the poor, mostly as individual rather than institutional initiatives.

Finally, growing awareness of Corporate Social Responsibility (CSR) in private sector businesses is making available increasing volumes of resources for helping out the poor; although thecurrent volumes may be rather modest.

* 'Extreme Poverty Eradication Day', 19 October 2009.


Weak targeting and leakage of resources are probably the main reasons for low success in redressing extreme poverty.

Although as the worst-off those in extreme poverty should be targeted first and foremost, not many of the poverty reduction initiatives are specifically targeted to them. Largely in social exclusion, the poorest are the most isolated and hardest to reach out to. Associated with the difficulties in targeting/reach-out is the leakage of benefits meant for the poorest to better off recipients, even to usurpation by influential well-off vested interests.

Zakat and other individual donations are usually doled out to poorer relations and others visibly poorer in immediate vicinity, not necessarily the poorest. CSR expenditure of private businesses likewise are often not specifically targeted to the poorest; even give aways benefiting connected interests in urban-based middle classes are sometimes seen publicized as CSR initiatives.

Besides high enough sustained growth in country's output and income, precise targeting of the poorest, leakage-proof benefit delivery mechanisms, accountability and assessment against clearly set goals and objectives will be important for speeding up eradication of extreme poverty.

Sustained growth in the country's output and income will-needless to say, be important in making available necessary public and private sector resources to combat poverty. Middle income status for Bangladesh is no longer a remote goal, looking attainable at current growth trends in 4 to 5 years for now. Middle income status will however sound hollow if a substantial part of the population continues to remain stuck in the distress and indignity of extreme poverty.

Smart-card/mobile telephone based delivery of government's social safety net benefits in cash to eligible beneficiaries should hopefully be an effective, leakage proof delivery mechanism, already used successfully elsewhere, for instance, in Indonesia. The electronic database created during preparation of electoral rolls for the last national election can be expanded and developed further into a national ID database necessary for such benefits delivery arrangements. Adequacy and quality of public provision of basic healthcare and primary education for the poorest needs to be revisited, to ensure that children of the poorest get sufficient human development opportunity and enablement to break free of extreme poverty.

Those among the poorest with permanent physical or mental debilities may have to depend wholly on government transfers; others should be assisted in gaining job skills or know-how and borrowing options for income and employment generating initiatives. NGOs can mobilize and pool up domestic and external donations for such initiatives from all available sources including CSR funds of private sector businesses, utilizing these in programs with clearly set goals, objectives and accountabilities. Banks and financial institutions can and should follow BB's CSR guidance in reorienting their CSR programs towards benefiting the poorest, including augmenting of support and credit flows for self-employment/SME initiatives of this target group.

To sum up, sporadic off-and-on attention will not be enough for quick headway against the stubbornly persistent high level of extreme poverty. Besides


sustained GDP growth at high enough rates, sustained strong engagement and abiding commitment towards opening up meaningful opportunities for all to participate in, and to benefit from inclusive growth will be needed in the diverse programs attacking various dimensions of extreme poverty; with precise targets, clearly set goals, objectives and accountabilities.


Macroeconomic Policy, Poverty Reduction and Inclusive Development*

I am grateful to our gracious hosts at ESCAP for this opportunity of sharing with you a Bangladesh perspective on the collective and country-level responses to the recent global financial turmoil and economic downturn, and on lessons from this in bolstering resilience and preventive defenses against future episodes of such crisis.

As we are looking for lessons from the crisis, we may begin with a brief glance at its genesis. The makings of the crisis were in the mounting global imbalances from about two decades of US external current account deficits; dollar's position as the dominant global reserve currency permitting indefinitely long spells of lax macro-economic policies in the US. The export driven Asian growth hubs kept financing the US deficits avidly, piling up mountains of dollar denominated US debt as reserve assets. The two sides occasionally exchanged blames for the global imbalance, citing excessive profligacy of the US and excessive frugality of Asia, with little said or done about putting in place safeguards in the global monetary order against buildup of large imbalances.

The surfeit of global liquidity arising from debt fuelled spending did help growth in real global output, but this contribution to real growth was outpaced by faster growth in financial claims, with credit bubbles created by glut of cheap liquidity leading to price bubbles in asset and commodity markets. As the credit and price bubbles collapsed in advanced markets precipitating chains of corporate and household insolvencies on massive scale, the distresses spread fast to reach the shores of our region; in lost export orders, failed businesses and lost jobs, plummeting tourist arrivals, return of emigrant workers retrenched in host markets abroad.

The global community has been quite quick in mobilizing coordinated near term responses to the fallouts from the global crisis, organizing massive rescue packages for bailing out failing institutions and markets, and massive stimulus packages to uphold economic activities and domestic demand in individual

*Seminar on 'Macroeconomic Policy, Poverty Reduction and Inclusive Development', organized by ESCAP, Bangkok, Thailand, 24 November 2009.


economies. The robust coordinated near term responses appear to have already averted the feared prolonged global economic downturn. Growth outcomes exceeding earlier downbeat predictions are being reported frequently, near and medium term forecasts for regional and global growth are also getting frequent upgrades. There are still lingering concerns about the robustness of recovery of some of the troubled large financial institutions, and finance ministers of the G-20 forum have held another round of consultations in early November 2009 in Scotland towards making sure that the recovery processes in the financial and real economy do not falter.

The crisis did not impact Bangladesh economy severely because of its limited, regulated openness to short term external capital flows. Despite some demand weakening in markets abroad, exports held on to double digit growth rate in FY 09, with real GDP growth slowing modestly to 5.9 percent against 6.2 percent of FY 08. GDP growth slowdown from the crisis has been much milder for Bangladesh than those suffered by larger, faster growing regional neighbors. Remittance inflows from migrant Bangladeshi workers continued on uptrend. Uncertainties associated with the global slowdown weakened new investment activities however, with decline in capital goods imports. Low outflows for imports from the growing export receipts and workers' remittance inflows kept local financial markets awash with liquidity. Bangladesh government made ample allocations in the FY 09 and FY 10 national budgets to uphold domestic demand by expanding the social safety net for the weak and vulnerable population segments, and to provide temporary support to economic sectors hurt in the global crisis. Bangladesh Bank (BB) on its part has maintained easy monetary conditions to facilitate investment activities, allowed banks to reschedule nonperforming export loans temporarily on more lenient terms, widened its foreign exchange lending window (the Export Development Fund) to banks for financing input imports of exporters, and has also launched elaborate refinance support networks for promoting bank lending to under-served sectors of productive economic activities including agriculture, SMEs, sustainability /renewable energy related projects. Broad-based, inclusive economic growth is viewed by Bangladesh Bank as the way forward in strengthening domestic demand by reduction of poverty in the country.

The emergency stimulus packages for temporary upholding of domestic demand will need to be substituted by longer term policy initiatives towards continuing strengthening of domestic demand and intraregional trade. Also, progress thus far has been limited on other longer term issues including the needed reforms in financial sector regulatory and compensation regimes, accounting standards, leveraging norms and tax treatments of debt finance and equity. Serious dialogue has not even begun about putting in place safeguards in the global monetary orderagainst buildup of large imbalances.

I hope our deliberations in this ESCAP forum can contribute usefully towards setting and pushing ahead the medium and longer term agenda in bolstering resilience to and defenses against future crisis episodes. In putting together the


important elements for a comprehensive agenda, here I have freely used the contents of the Dhaka Outcome Document of the ESCAP-BB regional high level workshop held at Dhaka in July 2009.

Unfinished agenda for the path ahead

Upholding and strengthening domestic demand: For our Asia Pacific region, this tops the to-do list for now as well as for the longer term. The blame on the supposed excessive Asian frugality for weaker domestic demand is misplaced, the rich and the rising middle classes in our region are as attracted by good things in life as their western counterparts. The root cause behind weaker domestic demand in our region is poverty and low income of large part of the population. Sustained inclusive economic growth with advancement opportunity open to all will be the key to strengthening of domestic demand by reducing poverty. In fostering inclusive economic growth, central banks in the region will need to be proactive in promoting financial inclusion, with action programs for bridging the market gaps and failures in reaching out to the excluded and under-served population segments and economic sectors. Some of such central bank refinance supported programs launched by Bangladesh Bank were mentioned earlier.

With the breakup of extended family structure in the recent times, safety-net support from the extended family for the weak and the vulnerable has dwindled rapidly; social safety-nets must now extend fast to take its place. Sustained inclusive economic growth should provide the increased revenues needed to finance expansion of the social safety networks; but richer advanced economies, multilateral development banks and private philanthropies will have important supportive, supplementary roles to play, particularly at times of crisis and emergency.

The vast majority of workforce in developing countries like Bangladesh being employed in the informal sector, promotion of well managed pension funds will be important in underpinning consumption demand from senior citizens as they retire from working life. The pension funds will also be important financing sources for infrastructure and other longer gestation investment projects.

Strengthening domestic demand in the region in ways suggested above will address at root the oft-alleged reluctance in the region to allow currency appreciation. Increased imports for meeting stronger domestic demand will weaken currencies in the region, ironing out any earlier undervaluation.

Promoting intraregional trade and investment: Our region is often blamed by the West for consuming too little of what the regional growth hubs produce. As explained in the preceding paragraphs, poverty and low purchasing power is the root cause, and lasting remedy lies in rapid poverty reduction powered by sustained inclusive economic growth.

Placement of the growing mountains of foreign exchange reserves of our region in financial markets in the West have done a disservice to the global economy,

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having been used there much less in supporting real output growth than in financial wizardries feeding instability with credit bubbles and speculative price bubbles. Since financial markets in our region failed to be proactive in channeling the mounting regional reserves in infrastructure and other growth supportive real sector investments in the region, stronger direction and guiding hand from inter governmental forums like the ESCAP may be a need of this hour. An added momentum to the Asian Bond Fund initiative may merit consideration, with increased equity contributions from the huge pile of regional reserves, and broader mandate including underwriting and market making in bonds issued by existing corporates and new investment projects in the region.

Governments in the region can consider establishing individual or collective sovereign wealth funds, using part of their foreign exchange reserve resources as equity, for infrastructure and other real sector investments in the region. There is no reason why returns from such investments would be inferior to those from placements of the reserves in financial markets in the West.

In promoting intra regional exports of capital goods, setting up/ strengthening of export credit guarantee outfits by capital goods producing countries in the region may be helpful.

Short term external borrowings become hard to refinance at times of stress, flightiness of external portfolio investments also accentuate instability in crisis situations. Stability concerns would suggest that in attracting external funds for investment, countries in our region should opt more for long term rather than short term borrowings, and likewise more for foreign direct investments rather than foreign portfolio investments.

Regulatory, supervisory reforms: (a) Procyclicality of capital requirements, and marking to market valuation of trading book assets required by international accounting standards sharply accentuated difficulties for banks and financial institutions at the height of the financial crisis. Ongoing expert level consultations in relevant global forums are expected to finalize appropriate reform recommendations in due course; but countercyclical features in varying degrees and forms already exist in regulatory regimes in individual countries. For instance in Bangladesh, a bank wishing to disburse dividend higher than twenty percent must set aside as retained earning a sum equal to the dividend in excess of twenty percent. Central banks may like to be proactive in introducing countercyclical capital buffers in forms best suited to the respective country circumstances.

(b) Reforms in executive compensation packages in ways that dissuade senior managements in banks and financial institutions from pursuing short term gains at cost to longer term institutional interests are being debated. Regulators in our region may wish not to wait for consensus from protracted global debate, immediately curbing any patently obvious impropriety or excess.

(c) In the recent global financial crisis, excessive leveraging of non-financial


and financial corporates sharply deepened distresses with extensive chains of insolvencies and consequent market freeze-ups. Expert level consultations on global best practice norms on leveraging are underway in the Basel forum of bank supervisors; regulatory authorities in our region may wish to be proactive in kicking off country level stakeholder consultations about leveraging norms appropriate for local circumstances. Differences in tax treatments of debt and equity require taxation reform placing debt and equity on more equal footing.

(d) In the recent global crisis episode position taking in commodity futures by globally active financial institutions including hedge funds played significant role in accentuating commodity price volatility, pushing global prices of many food and non-food commodities to dizzying heights. Position taking incommodity futures by financial institutions and others that are no part of the supply chains do not facilitate price discovery and serves instead to distort and destabilize prices towards profiteering from volatility. A global consensus debarring financial institutions from position taking in commodity futures will be an important safeguard against instability. For similar reasons appropriate regulatory barriers against speculative use of derivates that are meant to be used as hedging tools merit consideration.

Regional cooperation and policy coordination crucial towards bolstering stability. The Chiang Mai Initiative taken up some years back has developed a network of bilateral swap arrangements between a number of central banks in East Asia for mutual assistance in situations of stress; the Asian Clearing Union between central banks in South Asia also has a modest swap arrangement for temporary trade settlement support to members in need. These mutual support networks can be integrated and extended to cover more central banks in the region. Several trade and economic cooperation forums have sprouted in the region over the years; but unlike the evolution of the European Union, mostly as yet without significant extent of policy coordination and with no unequivocal articulation of integration towards monetary union as definitive goal or vision. It may be high time now for these regional cooperation initiatives to consider crystallizing visions and goals as fully integrated platforms for safer sailing through future global crises.

Dialogue on reforms in the global monetary order is a must. To begin with, I would like to draw attention to the insufficient, even non-existent voice of smaller developing countries in current practices of global dialogues. Regional forums like ESCAP can usefully advocate and advance the case for the voice of the smaller countries in global dialogues, by way of participation of a suitable number of these countries nominated by rotation say, every 2-3 years.

The prevailing global monetary order has proven deficient in safeguarding global balance and stability. As mentioned in the beginning, the current global crisis originated with continually mounting global imbalances permitting global liquidity to perilously outpace real global output growth, inflating credit bubbles and price bubbles that collapsed eventually with attendant widespread distresses for all.


Among various reform possibilities one option could be to tether global liquidity growth to actual or potential growth in real global output; with issues of national and regional currencies needing to be backed by a global unit of settlement (say the SDR) allocated by an apex global monetary agency (say, an appropriately reconstituted IMF) annually, proportionately with potential growth in global real output. Global dialogue on substantive reforms of the existing monetary order is yet to start off in right earnest. If this is delayed indefinitely to be forgotten as the world recovers from the current crisis, it may not be very long before another episode of global imbalances cause surging global liquidity to inflate another round of credit bubbles and price bubbles, eventually collapsing to precipitate the next global crisis.


Operationalising pro-poor Growth: Research-policy Links*

It is my pleasure that I'm honored to be invited here as I'm getting a chance in taking part with my few words at such an important and practical roundtable discussion.

The PRSP and the next FYP seek inclusive growth towards opening up advancement opportunities for all, with increasing social and financial inclusion. GOB and BB policies have focused on SMEs and small landholder agricultural activities for special support intervention. It will be timely now for professional economists to investigate the impact of these interventions at the micro-macro interface; to find out the extent and nature of linkages that these interventions are helping develop between larger formal businesses and the SMEs and rural small farming households.

Exports of Bangladesh are still heavily concentrated in the apparels and textiles sector; in spite of initiatives such as the SAPTA of SPARC and EBA of the EU opening up tariff preferences on many other industrial products from Bangladesh. A research initiative from the applied economists can usefully investigate whether the apparent indifference of our exporters to these new opportunities arise from ignorance, and how best to enhance alertness of our entrepreneurs in locating and availing of prospective new export opportunities in both the existing and the prospective new markets abroad.

Over the recent past, the extended family structure that provided some safety-net support and protection to members in personal debacles or natural calamities have largely disintegrated, requiring substitution by publicly funded social safety-net. Resources available from meager public revenues will clearly be inadequate for a comprehensive publicly funded safety-net covering the entire population. Equity demands that public resources are used for the worst-off, i.e., the poorest, as in the current approach. A research initiative investigating how best to promote development of private sector safety-net structures in various forms such as insurance (life, endowment, the newly emerging micro-insurance, crop insurance), pension funds and provident funds will be of substantial policy relevance.

*Roundtable discussion on 'Operationalising pro-poor growth: research-policy links' jointly organized by BIDS, Economic Research Group and International Growth Centre, 15 December 2009.


The private sector in Bangladesh has substantially taken over healthcare and education for the better off sections of the population; freeing up public resources for better attention to basic healthcare and primary/secondary education for the poorer rural and urban population. A research initiative from the economics profession can usefully look into whether public resources should be spent on establishing further new tertiary education and healthcare institutions in the public sector, or instead in strengthening the existing establishments, particularly in areas of applied and basic research.


Bangladesh India Co-operation in Economic Development and Poverty Reduction*

Potential for co-operation yet to be realized: Given limitations of resource endowments and of size and purchasing power of the internal markets, Bangladesh is doing reasonably well in terms of economic growth and development. The big neighbor India with more diverse endowments and much larger internal markets is growing substantially faster. It is everyone's belief that closer bilateral co-operation between Bangladesh and India with higher intraregional investment and trade can benefit both countries with fuller utilization of the complementarities and comparative advantages in producing for markets within and beyond; promoting output, employment, income and thereby hastening reduction of the still pervasive poverty.

It is also everyone's disappointment that the two countries have underperformed in reaping the possible benefits of closer mutual co-operation. Despite wordy announcements of wishes and intentions, specific steps towards greater openness in trade and investment co-operation have tended to be hesitant and overcautious rather than bold or decisive; tinged with apprehension on the side of the smaller partner that its interests could be over-swept by those of the much bigger counterpart; and on the other side that the smaller partner could act in league with other countries to the detriment of its economic and strategic interests. With bilateral trade continuing in huge surplus for India and with very little of Indian FDI coming into projects in Bangladesh, there is need and scope for going far beyond a mere opening up of inland transport routes of Bangladesh for overland transit of trade traffic between Indian regions in reducing the large bilateral trade imbalance substantially over the medium term.

The new window of opportunity is opening. The neighborly relationship between the elected popular governments now running Bangladesh and India is bonded in mutual trust and confidence that they have no motive or intention of acting against each other's legitimate interests including those for internal peace and security. With the political will and understanding at the highest level necessary in forging robust economic co-operation now in evidence, it is strongly

*Seminar on 'Bangladesh India co-operation in economic development and poverty reduction- targeting a new breakthrough', 11 January 2010.


hoped that the window of opportunity will not be missed this time in launching a fresh thrust for a major new breakthrough in trade and investment cooperation between the two countries, intensively involving the private sector businesses and the civil society in both countries, apart from the governments. Seen from the Bangladesh perspective, the following are some major areas that will be useful for the new thrust to focus on.

After years of facing various non-tariff, para-tariff and countervailing duty barriers, some export items from Bangladesh are slowly making inroads into markets in mainland India and in her Eastern provinces, taking advantage of tariff concessions under SAPTA and SAFTA, MOUs between standards institutions of India and Bangladesh, improved banking arrangements in the Eastern Indian provinces for settlement of bills for imports from Bangladesh, and other improvements. Items now being exported include, besides raw jute and apparels in specified quantities, accumulator batteries, jute twine, yarn, cordage and ropes, cement, bricks and frozen fillets. The tariff, para-tariff and non-tariff barriers push trade into informal channels, removal of the remaining barriers will bring the current illegal, informal trade into the legal, formal channel, capturing the trade and its operators in the tax nets of the governments.

There are many more items of industrial manufacture of which exports from Bangladesh could take SAPTA/SAFTA concessional tariff advantage in India; Bangladeshi exporters are not yet doing so either because of production capacity constraints, or ignorance or both. Private sector businesses in Bangladesh and India can be encouraged and supported in strengthening contact networks to search for and take advantage of the production and marketing opportunities in each other's countries. Indian entrepreneurs can, in joint ventures with Bangladeshi counterparts or even solely on their own, establish production bases in Bangladesh for exports to India and wherever else there are tariff preferences for exports from Bangladesh as an LDC. Outsourcing from, or subcontracting to the upcoming SMEs in Bangladesh in various sectors including light engineering, electrical and electronic products, footwear, melamine and plastic products etc. can be the other options for Indian entrepreneurs for mutually beneficial engagement with Bangladeshi entrepreneurs for expanding their manufacturing and trading activities.

FDI in Bangladesh: Indian investments are seen looking for destinations around the globe, thus far Indian FDI in Bangladesh have been small. Bangladesh maintains a very congenial non- discriminatory FDI regime with restriction-free repatriation facilities for investments and returns thereon. Indian investors have ample opportunities for investment in Bangladesh in manufacturing, services and infrastructure sectors, including participation in Public Private Partnership initiatives. In the recent years, private sector telecommunication, healthcare, hospitality and education services have flourished in Bangladesh, involving substantial FDI participation. There is still ample room for further growth with participation of Indian and other foreign entrepreneurs, particularly in developing the hospitality (hotels, tourism) services. With expanding intra and extra regional trade and travel, cross-border transport services by sea and air can be another area for co-operation and Indian FDI participation in joint ventures in Bangladesh.


The fast rise in wage costs in India for IT and other services professionals is creating need and scope for the Indian service sector exporters to retain competitiveness by engaging with the young professionals graduating from engineering and technical institutions in Bangladesh. This can develop both by way of outsourcing and attracting Bangladeshi service professionals in job positions in India (mode IV, GATS). There is significant extent of engagement of Indian service professionals in private sector manufacturing and service provider establishments in Bangladesh; beginning of reciprocal employment of Bangladeshi professionals in the Indian market will help create and strengthen public opinion in favor of closer bilateral and regional economic integration.

Energy co-operation: Economic growth pursuits in Bangladesh are now being impeded seriously by energy shortages, particularly shortages in electricity. Besides the medium term proposition of Indian FDI in the power sector, Bangladesh could benefit in the near term from Indian co-operation in accessing surplus power generation capacities in Bhutan and the Eastern Indian provinces through a linked, shared regional grid; in a regional multilateral co-operation framework opening up Chittagong and Mongla ports of Bangladesh for external trade of Nepal, Bhutan and the Eastern Indian provinces.

One may add many more possible new areas of Bangladesh-India economic co-operation, provided there is a commitment for win win engagements. The Indo-Bangladesh relationship born in sacrifices in 1971 deserves to be taken forward to a new height, gradually widening further the window of opportunity that has now opened up.

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*DCCI Seminar on 'Sovereign Credit Ratings', on 22 April 2010.

Sovereign Credit Ratings*

The first ever sovereign country ratings of Bangladesh by two global raters S&P and Moody's have been hearteningly favorable, ahead of all our South Asian neighbors except India. These ratings are a vote of confidence in Bangladesh as a promising investment destination. The role of our business community in the economy certainly had important positive contribution in this earning of favorable sovereign credit ratings, for which I take this opportunity to thank our business community heartily. The deficiencies in power, gas and physical infrastructure now besetting us are growth constraints for sure, but are at the same time investments opportunities as well. I would urge our business community to take full advantage of these opportunities, where necessary in joint ventures with foreign investors reassured by the favorable sovereign credit rating.

I believe our business community including banks will be proactive in negotiating lower interest costs on foreign borrowings and credit confirmation lines, commensurate with thefavorable sovereign credit ratings. Our businesses can go further in reducing their local borrowing costs as well, by getting themselves rated by local or international rating agencies. This opportunity arises from the newly introduced Basel II capital regime for banks in Bangladesh, which has lower risk weights and correspondingly lower capital charges on loans to favorably rated businesses. Banks will be able to pass on to favorably rated borrowers the lower carrying costs of loans, with lower interest rates.

In the euphoria about the favorable first ever sovereign credit rating let me conclude on a sobering note, drawing attention to the new responsibility of preserving the favorable rating; because costs of foreign borrowings and credit lines will go up with any negative change in rating or outlook. Both S&P and Moody's have mentioned the government's low revenue base and the country's narrow export base (very high dependence on apparels) as rating constraints.

Good tax compliance will ease the former, and diversification of the export basket will ease the latter. We shall all need to remain proactive in playing our due roles in attaining these objectives. In particular, we will have to be persistent in taking forward the promised reforms in NBR and providing additional incentives for diversification of exports including potential sectors like shipbuilding and skill-based human resources.


Bangladesh Bank in a Year since May 2009*

Shadows of an ongoing global financial crisis and economic downturn were looming on the economy when I took over as Bangladesh Bank Governor on May 9. Our tradition of cautious discipline in economic management served well to protect Bangladesh economy from major harm; but demand weakness in our traditional markets of export goods and manpower necessitated monetary and fiscal support and stimulus in coordinated package to uphold domestic demand and to sustain growth. Our financial sector was generally in good shape, with banks on course for adoption of Basel II capital regime and the attendant shoring up of risk management. Bangladesh Bank (BB) itself had major institutional reforms ongoing, including commissioning of ERP, Banking and Data warehousing facilities with all BB offices in an online-integrated IT platform; payment system strengthening with automated clearing and settlement of paper based and electronic fund transfers; and full automation of CIB with online accessibility by banks for inputting and extracting credit information.

The shortcomings inherent in our financial sector's narrow focus on a mainly urban better-off client base were however laid bare in the aftermath of the global slowdown. Surplus liquidity in banks kept swelling as loan demand from this better-off urban client base weakened. Banks kept on parking with BB their swelling fund surpluses as zero return excess reserves, although effective swift channeling of these funds in financing the under-served masses of rural and urban poor for the multitude of their small scale on and off farm productive activities could have generated higher employment, output and income, stimulating the economy both on supply and demand sides. Corporate Social Responsibility (CSR) performance of the financial sector also had major gaps, particularly in addressing environmental concerns.

BB policies and programs did have instructions and guidance for the financial sector for reaching out to small farmers and SMEs, as also for embracing CSR obligations; but commitment among the BB staff themselves to these financial inclusion and CSR objectives remained to be widened and firmer ingrained.

*Posted on BB web page (www.bb.org.bd) on 2 May 2010


It was in this context that I picked up thrusts in financial inclusion and CSR as the first priority for my initial months in BB. Besides immediately embarking on multi-pronged programs targeting and tracking disbursement of substantially higher credit flows for agriculture (including small holder and sharecropper farming), SMEs and environment friendly projects; BB's strategic goals and objectives were revisited and refocused in a strategic planning retreat, clearly articulating and cohesively integrating financial inclusion and CSR objectives within the core central banking priorities of maintaining price stability, financial system development and stability, and support for national policies pursuing sustained high inclusive economic growth for rapid poverty reduction and human development.

Secondly, while pushing ahead with new thrusts in financial inclusion and CSR, the reform agenda already ongoing in BB was not left in neglect, and given fresh push towards completion on or ahead of schedule. Programs for upgradation of knowledge base and analytical skills of BB staff have received particular attention.

Thirdly, I opted for a more open consultative, communicative approach with external stakeholders and media in policy formulation and dissemination; for a heightened profile at home and abroad for BB's policies and programs. Initiatives in this direction included frequent field visits and press briefings by me and others in BB senior management; frequent stakeholder consultations preceding policy formulations; increased participation of BB staff in local and foreign seminars / workshops / conferences; a cross-country road show reaching out to people to highlight new services offered by the financial sector.

I am gratified that BB initiatives during the year since May 2009 have helped the Bangladesh economy and BB in maintaining decent growth and price stability performance, while also attaining or crossing quite a few important new milestones. Major outcomes over the year included:

i) 5.9 percent real GDP growth in FY 09 at the height of the global crisis with double digit growth in export and workers' remittance inflows, not far below the 6.2 percent FY 08 growth. CPI inflation has been on uptrend in FY 10 (9.06 percent p-to-p and 5.95 percent annual average as of February 2010), driven mainly by rising import prices of tradables, but are at levels lower than in most of our South Asian neighbors.

ii) BB's foreign exchange reserves reached and exceeded USD 10 billion, with net foreign assets of the banking system growing by 86.5 percent y-o-y in February, 2010.

iii) A visiting Financial Sector Assessment Program (FSAP) mission of IMF assessing the financial sector of Bangladesh in 2009 with stress tests and other quantitative and qualitative diagnostics reported our financial sector as being generally in healthy shape. This was heartening, particularly as financial sectors in most of the mature developed economies were at that time in severe solvency and liquidity crisis.


iv) The maiden sovereign credit ratings of Bangladesh by both S&P and Moody's turned out to be more favorable than for most of comparator developing economies, ahead of all South Asian neighbors except India; signaling a vote of confidence on Bangladesh as an attractive investment venue, and promising more favorable costs and terms for external borrowings by our businesses.

v) Automated clearing and settlement of paper based (cheques/drafts etc.) and electronic fund transfers commenced in April 2010, as a major step ahead in payments system efficiency. A number of innovative bank-led partnerships of banks, MFIs and mobile phone companies for efficient cost effective IT based remote delivery of remittances, and other financial services commenced operation during the year, important steps forward in deepening financial inclusion and realizing the government's vision of digital Bangladesh.

vi) A new group-based scheme of agricultural loans for sharecroppers introduced under supervision of an MFI. A newly created SME Department in BB issued SME lending guidelines for banks.

vii) Guidelines and instructions issued for mandatory stress testing at half-yearly intervals in banks for regular self-assessment of their vulnerabilities, with BB's supervisory oversight.

viii) Investments in infrastructure projects (including those under Public Private Partnership) rendered boost with IPFF, a WB funded financing line managed by BB.

ix) Part of BB's burgeoning foreign exchange reserves are now being deployed in newer growth supportive uses, including placements in offshore units of banks and augmentation of the Export Development Fund (EDF) for financing capital goods and input procurements of direct and deemed exporters. Amounts of foreign exchange accessible by residents for travel and other current external expenses without prior BB authorization were also enhanced substantially.

x) Solar power panels installed in BB's main building roof top now meet part of the power needs of daytime lighting of the executive floor and nighttime lighting of the boundary walls of HO premises. A BB refinance line is available against lending for renewable energy and effluent treatment projects. Alongside existing refinance lines against agricultural and small enterprise loans, BB refinance is now available also against financing for raw jute (a biodegradable natural substitute for polluting synthetic packaging materials) purchases by BJMC.

To motivate and facilitate wider, more well-rounded engagement of our financial sector in CSR actions, BB has recently released the first issue of a review of CSR activities of banks covering the years 2008 and 2009; surveying their current engagements and the gaps/ missing dimensions yet to be covered adequately.

xi) Deft monetary and fiscal management of Bangladesh during the global financial crisis and economic slowdown, and BB's work in promoting financial


inclusion have attracted substantial external interest. During the year I have been invited frequently to speak on these issues in regional and international events in Indonesia, Singapore, India, Kenya, Uganda, Thailand, Turkey and UK.

Here we need not go into all details of BB's multidimensional activities over the year; these are available in reports and reviews accessible from BB website (www.bb.org.bd). I would like instead to sum up by reasserting that BB intends to reap over the coming years the fullest possible benefits from financial inclusion and CSR engagements in terms of inclusive, environmentally sustainable economic growth at sustained high rates and steeper decline in poverty. A few sentences may be in order here about how we see financial inclusion and CSR linked up with traditional central banking priorities of price stability and financial sector stability. Monetary and credit policies of BB seek to contain inflationary pressures both on the demand and supply sides. Demand side pressures are kept in check using monetary policy instruments to regulate liquidity and monetary growth; while credit policies and programs aimed at channeling adequate credit flows to all productive sectors are employed to stimulate supply responses easing price pressures. The thrust for fuller, deeper financial inclusion of all population segments and all productive sectors will lead to financial deepening affording wider, newer transmission channels of monetary policies for more effective containment of price pressures on the demand side. Financing access afforded by financial inclusion to micro, small and medium scale enterprises will simultaneously yield increased output response on the supply side, easing price pressures with increased contribution to the country's GDP. While GDP measures merely quantify output growth, inclusive growth is concerned also with the quality dimensions of environmental sustainability and fair advancement opportunity for all population segments in the society. From this inclusive growth viewpoint, promoting financial inclusion is a compelling CSR obligation for the financial sector.

In promoting financial inclusion, BB is looking forward to more of innovative partnerships between banks, MFIs and mobile phone companies and payments related IT platforms coming up with manifold new cost effective financial service delivery packages specifically tailored to the needs of the urban and rural poor and their economic activities thus far not served or under-served by the financial market. These partnerships need to be bank-led, because of prudential regulatory and consumer protection concerns. BB intends to pursue survey and analytical work tracing and monitoring the linkage sequence of financing output generation-output marketing by micro and small-scale enterprises. Services produced by such enterprises are unlikely to face major marketing difficulties, as rising income of the poor will generate growing demand for basic services. Micro, small and medium scale enterprises may however face challenges in marketing their farm and non farm products profitably enough, unless they can link up viably with or organize collectively into larger businesses for marketing or further processing of their outputs. BB will welcome collaboration of the academia, CSOs and think-tanks in these and other related studies and analytical investigations.


Highlights of Bangladesh Bank Policies and Activities during the Year since May 2009

Bangladesh Bank (BB) has been supporting the priority sectors such agriculture and SMEs with the view of attaining inclusive and environmentally sustainable economic growth commensurate with stable price level. Besides, BB on its part is moving fast in attaining a digital financial sector by 2021. BB has taken strong initiatives in recent times to widen the coverage of banking services, especially by including the disadvantaged section of the society in the formal financial system. A glance of these initiatives are summarized below:

Successful Economic Management during the Global Financial Crisis and Economic Downturn

The limited, regulated openness of Bangladesh economy to short term global fund flows kept the financial sector of Bangladesh free of toxic assets and contagion from the global financial crisis. Net FDI inflows remained positive even at the height of crisis, a small net FPI outflow has been far outweighed by sustained surge in remittance inflows from workers abroad using enhanced exchange house facilities introduced by Bangladeshi banks in different countries (savings transfers from jittery markets in host countries, besides usual subsistence money for dependents). Competitiveness of the apparels sector kept FY 09 export growth of Bangladesh in double digits, despite export decline in other commodities. Decline in import of food grains due to good domestic harvest and generally lower global commodity prices kept overall import payments low and thus improving the overall trade balance. The low outflows from the surging inflows of workers' remittances and export proceeds kept local financial markets awash with liquidity, in sharp contrast with most markets elsewhere facing liquidity crunch triggered by large scale flight of FPI and other short term funds.

BB encouraged the financial sector to utilize the liquidity glut in supporting productive pursuits, including lending more to typically under-served sectors like agriculture, SMEs, renewable energy projects etc., keeping BB refinance lines available there against in case of need. Export sectors hurt by demand weakness received modest government subsidies, incentives for exports to new markets, and some tax/fee waivers etc.; the government also expanded social safety net expenditures. BB allowed temporary relaxation of bank loan rescheduling terms for affected exporters, besides maintaining easy credit conditions with supportive monetary policies. These support measures cushioned the impact of the global slowdown; 5.9 percent real GDP growth was attained in FY 09 following 6.2 percent growth of FY 08.

CPI inflation remains moderate compared to other South Asian countries (annual average 5.95 percent as of February 2010); BB's monetary policies aim at containing inflation at moderate single digit levels. The floating exchange rate of Taka (1 USD=Taka 69.2550, weighted average, in interbank market on 20.4.2010) remains stable, with BB's market interventions maintaining a slight undervaluation bias for competitiveness.


From 2010, Basel II based capital adequacy is mandatory for banks. A visiting Financial Sector Assessment Program (FSAP) mission of IMF assessing the financial sector of Bangladesh in 2009 with stress tests and other quantitative and qualitative diagnostics reported Bangladesh's financial sector as being generally in healthy shape. In the aftermath of the global financial crisis, ways of introducing/reinforcing counter-cyclical elements in capital and provisioning requirements are being regularly looked into.

Supporting Sustained Agriculture Growth

The agricultural credit program announced by BB enjoins all banks to engage in lending for a comprehensive range of on- and off- farm rural economic activities, with refinance lines available to them from BB in case of need. The target for disbursement of agricultural/rural credit for FY 2009-10 has been set at around Taka 11.5 thousand crore, a record, which is about 23 percent higher than the previous fiscal. A 3-level monitoring system (BB Head Office, BB Branch Office and Banks) has been developed to ensure proper disbursement and recovery of the loan. Besides, bank branches are advised to display the list of the farmers in the notice board.

BB has launched refinance scheme of Taka 500 crore for the sharecroppers, a first ever initiative for the sharecroppers who had been in the 'missing middle' for a long period in access to institutional credit. Banks are now advised to allow farmers to open bank accounts at only Taka 10. About 8.5 million farmers have already opened bank accounts since the measure taken by BB. Such measure will smoothen the process of agriculture subsidy and will enhance BB's objective of strengthening and broadening the process of financial inclusion. Besides, the Governor of BB directly monitors and directs the refinancing schemes to ensure proper monitoring system of credit disbursement. The newly recruited Assistant Directors are visiting the farmers at the district level to identify the obstacles in accessing bank credit. A strong monitoring and evaluation mechanism has been set up both at the Headquarter and branch offices of BB.

The agriculture sector output activities are responding robustly to market price incentives and support measures provided by the Government of Bangladesh and Bangladesh Bank. During July-March FY 2009-10, the growth of agricultural credit disbursement was recorded at 18 percent against 9.4 percent during the same period of FY 09. Around 71 percent of the total target has been achieved in the first nine months of the current fiscal.

Supporting and Strengthening SMEs

The role of Small and Medium Enterprises (SMEs) is important for overall economic development of a country particularly for developing countries like Bangladesh. Since this sector is labor intensive with short gestation period, it is capable of increasing national income as well as rapid employment generation. BB has provided refinance support for expanding small enterprise financing. ADB and IDA are also co-financing this refinancing line.

A new 'SME and Special Programmes Department' has been established in BB for policy formulation and monitoring of SME financing activities of the financial


sector. The new department has issued SME lending guidelines titled "SME Credit Policy and Programmes". The guidelines seek to promote an 'area approach' identifying and utilizing the specific comparative advantages of different regions for the diverse range of SME activities.

A total target of SME credit worth Taka 240.0 billion has been set by the banks and financial institutions for the first time in 2010 considering SME development as a high policy priority. Among SME enterprises/entrepreneurs in our country, small entrepreneurs have more prospects for generating employment, reducing unemployment and achieving economic growth. Keeping this in view, at least 40% of the total disbursement target of SME credit has been reserved for small entrepreneurs with the rest allocated to medium entrepreneurs.BB has taken steps and formulated a guideline for the banks and financial institutions to ensure more institutional financial facilities for women entrepreneurs in SME sector. To ensure balanced industrial development, at least 15% of total BB refinance fund for SME sector has been allocated for women entrepreneurs. Besides, Banks and Financial Institutions may provide a maximum loan facility of Taka 25, 00,000/- against personal guarantee if borrower is woman or majority of the owners of the enterprise are women. Banks/Financial Institutions are also suggested to establish special advice and service centre for women entrepreneurs in selected branches and to ensure service friendly approach towards women entrepreneurs.

Digital Bangladesh Bank

Bangladesh Bank, being the monetary authority of the country, is at the forefront of government's firm commitment to be digitized. BB has achieved a historic milestone in trade and business arena, departing conventional banking with the introduction of e-commerce recently, a giant stride towards digital Bangladesh. Banks have been allowed to make online money transactions; payment of utility bills through internet, transfer of funds (account to account), payments for trading goods and services, and facilitate online credit card payments in local currency. Indeed, the electronic payments will be considered as cash transactions, which will be regulated under the 'Anti-Money laundering Act' as well as other relevant rules and regulations. A national payment gateway, connecting all banks for inter-bank transactions (e-banking) is expected to be established soon.

BB is on the lookout for creative partnerships in regulated IT based remote delivery of financial services. A number of BB approved initiatives are already in operation (to begin with, mainly in utility bill payments and in delivery of remittances from Bangladeshi workers abroad to their families at home), others are at various stages of implementation, with some of these including smartcards and POS terminals in delivery networks besides mobile phones.

Installation of Bangladesh Automated Clearing House (BACH) is a remarkable event in the history of financial sector in Bangladesh which will ease the remittance channel and payment system and, therefore, will bring dynamism in business activities. The system has been started in early November 2009 on experimental basis, participated by some well prepared banks and will be


inaugurated formally soon. The system will support both intraregional and inter-regional clearings based on a centralized processing centre in Dhaka and designated clearing regions; conforms to the international best practices, cost effective solution for cheque processing.

A modern and technology based health care system has been developed in the Central Bank keeping electronic record of medical information including disease and medicine history of the patients, digital prescription, stock of medicine etc. Central Bank reform program initiated ICT packages; includes Networking, Banking application, Enterprise Resources Planning Solution, Enterprise Data Warehouse etc.; with a view to ensuring efficient management of assets including human resources.

Under networking program, all the departments of BB Head Office and its nine branch offices have already been brought under computer network (LAN/WAN) connecting almost 3100 PCs. Therefore, any official sitting elsewhere in BB (Head office or branches) has access to the same kind of resources; sharing knowledge and information; ensure knowledge based management.

Enterprise Resources Planning (ERP) solution covers digitization of procurement (e-procurement), cash management, access control etc. Meanwhile, recruitment process under BB has been digitized (online application, sorting, validation etc.). Banking application includes automation of all the accounts with BB (banks, financial institutions and government), Foreign Exchange Management, Currency Management, Treasury and Securities Systems/Module, Public Debt Management Module, and also establishment of a Central Depository System (CDS) to build a platform for secondary trading of treasury bills and bonds.

Enterprise Data Warehouse (EDW) creates an electronic data bank, which will provide all information and statistics of monetary, trade and fiscal areas of the national economy, where all the concerned people of BB will have access to use it for further policy analyses.

BB is going to commence web based e-tendering system pretty soon which will cover announcement of tender, distribute schedules, bidding etc. to ensure simplicity and transparency of tendering process.

Mobile Banking

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. Remitters and recipients not well-served by banks have often been lured by fast acting hundi channels diverting the foreign exchange inflows to illegal capital flight, tax evasion and crime/terrorism financing.

Mobile banking, using cell phone as a tool, extends banking services to the door of the mass people. Fast expanding mobile telephony in Bangladesh already covers well over half the total adult population. This has opened up windows of opportunity for creative partnerships of banks and mobile telephone companies in devising cost effective arrangements for delivery of remittances (and


eventually other financial services) through the countrywide area agent networks of mobile phone companies covering rural areas distant from bank branches. BB has now been encouraging such partnerships between banks and mobile phone networks, a number of such BB approved partnerships are already active.

Recently, BB has strengthened its monitoring and supervision activities on agricultural and SME loan with the help of the existing countrywide mobile network, keeping record of cell phone numbers of farmers and small entrepreneurs.

Automation of Credit Information Bureau

Online CIB report, a pivotal component of risk management measure, is expected to be experimentally launched by June 2010. The final operation of CIB will then be launched in October 2010. Banks and financial institutions will be able to access the CIB data base online, and get the credit report of the concerned borrower. The database consists of detailed information of individual borrowers, owners and guarantors. Meantime, a project 'online credit bureau' has been started using advanced technology to establish online connectivity between CIB of BB and Head offices of all banks and financial institutions. It is crucial to upgrade the capacity of CIB to respond the policy priority accorded to financial inclusion; expansion of SME and agricultural lending, and overall increasing growth of trade and business. Online CIB will minimize the extent of default loan by facilitating the banks and financial institutions with credit reports of the loan applicants very quickly, and therefore, lending institutions would not encounter any credit risk while extending lending or rescheduling facility.

Monetary Policy

Monetary policy of BB aims at maintaining price stability while permitting monetary expansion needed to support output growth at sustained high rate. In connection with the monetary policy announced for the first half of FY 2009-10, monetary policy for the second half of FY 2009-10 has been announced with the view to achieving sustainable and higher economic growth, ensuring credit to the productive sectors and achieving higher growth in exports and remittances. For the first time, drafting of the Monetary Policy Statement for the second half of FY 2009-10 was preceded by extensive stakeholder consultations from the grassroots level up to the level of experienced professionals including past Finance Ministers /Advisers / Governors, think tanks and trade bodies. Moreover, an in house policy committee has been constituted with top central bankers including governor and deputy governors to brainstorm on monetary policy issues every month. This exercise is strengthening the capacity of the bank in formulating monetary policy, which is the principal activity of BB.

In campaign field visits for wider financial inclusion BB Governor and his senior management team members have interacted at grass roots level with people engaged in farming and in SMEs. The broad consensus emerging out of the stakeholder consultations is that supportive monetary stance and stimulatory fiscal stance need to continue till fuller restoration of investment confidence in the domestic economy with firmer demand recovery in export markets emerging out of the global recession; with exercise of due caution about inflation risks on the path ahead.


In this monetary policy statement, BB seeks to support enhancement not only in quantum but also in quality of growth measured in terms of inclusiveness and environmental sustainability. Therefore, BB has recently embarked on campaign-like thrust on broadening financial inclusion, and has launched several refinance support lines for increased lending to sectors like agriculture, SMEs, effluent/waste disposal, solar/ biogas/other renewable energy projects. Real GDP growth rate is predicted at 5.5-6.0% and average inflation rate is forecasted at 6.5%. More emphasis has been given in containing the supply chain in the Open Market Operations (OMS) and other supply side factors. Besides, the major portion of the excess liquidity prevailing in the banking system has been used in channeling credit to the private sector and import payments to ease inflationary impacts of excess liquidity. Government loan from the banking sector has declined due to increasing reliance on foreign borrowing and investment in National Savings Scheme for deficit financing which will in turn enhance credit availability to the private sector. Indeed, the flow of credit to the private sector has already been started picking up.

Institutional Reforms and Measures to Strengthen Financial Base of the Banks

Bangladesh entered the Basel II regime, the latest version of risk-based capital standards set for banks worldwide, on the first day of 2010 where BB instructed all scheduled banks to follow the guidelines on risk-based capital adequacy (RBCA) from January 1. This newly introduced Basel II capital regime for banks has lower risk weights and correspondingly lower capital charges on loans to favorably rated businesses. Banks will be able to pass on to favorably rated borrowers the lower carrying costs of loans, with lower interest rates.

To create favorable environment for risk management, BB has issued guidelines for banks to open their own risk management unit. TOR for the risk management unit has already been fixed. To build strong foundation for risk governance, a risk management unit will also be set up in BB. Besides, BB has already started applying stress testing exercise in all banks to evaluate bank risks more clearly and technically.

Dhaka Inter-Bank Offer Rate (DIBOR) has been started to widen and deepen Inter- Bank transactions where banks will fix interest rates by treating DIBOR as the benchmark. DIBOR will be considered as the benchmark interest rate in order to determine the interest rate of inter-bank financial market and time loan. By implementing DIBOR, transparency and accountability will be established in determining Banks' loan and deposit interest rates.

A new Department named Debt Management Department has been established in BB to properly manage government debt. To enhance the program further, well trained employees as well as logistic supports (internet, computer and other logistics) have been provided.

Circular has been issued to avoid sell-purchase settlement risk between two banks in Delivery Versus Payments (DVP) system.

Measures regarding good governance have been strengthened to confirm better bank management. Circular containing comprehensive guideline has been


issued for the directors of banks so that they can play their oversight role more efficiently under banks' corporate governance.

Bangladesh Bank has issued circulars mentioning the highest rate of service charges and commissions that can be applied by banks to make interest rates, charges and commissions logical. A master circular has been issued to manage and fix the interest rate for the priority sectors and to support and extend opportunities for Export Development Fund (EDF).

Foreign Exchange Management

The foreign exchange reserve of the country has crossed USD 10 billion in FY 2009-10. To reduce uncertainty and to facilitate exports, stability in the foreign exchange market has been assured. Credit facility under the Export Development fund (EDF) has been increased to USD 300 million from USD 150 million to help expansion of exports. Credit facility against export is now USD 10 million. Besides, mills of BTMA have been brought under the EDF facility. The obligation of taking BB's approval for foreign exchange transaction regarding foreign trainings, education costs under current account has been relaxed as a step toward liberalization of foreign exchange market.

A wide range of measures has already been adopted to keep the economy safe from the contagion effects of global meltdown. Export subsidy/cash incentive has been enhanced for affected industries, Frozen food, Jute and leather products (shipped April-June 09).

Besides, plastic and finished leather products have been included in addition to the existing 13 categories of export subsidies. 70 percent of the export subsidy/cash incentive may be released before audit formalities, and remaining 30 percent shall be payable after completion of audit. Limit of advance payment from Exporters' Retention Quota (ERQ) has been enhanced to USD 10,000 from USD 5,000 for emergency import payment. Loan rescheduling conditions have been relaxed, waiving down payment requirements (up to Sept 30, 2009) for recession-hit export oriented industries (depending on banker-customer relationship), especially frozen food, leather and leather products, jute and jute goods, textiles (including spinning) and RMG. Regulations for undertaking forward transaction of foreign exchange have been liberalized to reduce the foreign exchange risk in international trade. The limit for borrowing (single borrower) from Export Development Fund (EDF) has been increased to USD 2.0 million from USD 1.5 million for importing raw materials (Back to Back L/C) against export L/C.

Green Banking

BB has introduced Taka 2.0 billion refinance line in FY 10 against bank loans for environment friendly investments in solar energy, biogas plants and effluent treatment plants. All commercial banks will provide loans up to Taka 1 crore for setting up effluent treatment plant (ETP), solar panel and bio-gas plant at a 9 percent interest rate. Recently BB switched over to solar-powered lighting by setting up a 20 kilowatt solar panel, as a move towards encouraging green energy in Bangladesh. A new refinance facility of Taka 5.0 billion has just been


introduced to capacitate jute sector, the age-old green pillar of Bangladesh economy.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) is gaining fast global acceptance as a standard for environmentally sustainable and socially equitable business practices. CSR programs of business can bridge the market failures and market gaps that limit the access of the poor to the services necessary for their well being and thus ensure inclusive economic development.

BB has been exhorting banks and financial institutions to embrace fostering financial inclusion as a CSR obligation. As part of it, the banking community has responded sensibly to the call for CSR and sustainable social development. A comprehensive review on CSR in banks has already been prepared by BB and posted in its website.

Bangladesh Bank Strategic Plan 2010-14

Bangladesh Bank has formulated a 5-year strategic plan for 2010-14 envisaging its vision and mission to retain performance excellence to keep pace with the evolving environment. In the plan, BB's vision is stated as to develop continually as a forward-looking central bank with competent and committed professionals of high ethical standards, conducting monetary management and financial sector supervision to maintain price stability and financial system robustness, supporting rapid broad based inclusive growth, employment generation and poverty eradication in Bangladesh. BB will catalyze and support socially responsible and environmentally sustainable development initiatives, interalia including fuller financial inclusion of under-served productive sectors and bringing in needed new dimensions in financial markets and institutions; to facilitate broad based growth in output, employment and income, for rapid poverty eradication and inclusive economic and social progress. Over the near and medium term, BB will develop core values such as professionalism, transparency and accountability, open-mindedness, team work, integrity, adaptability as well as will formulate strategies for efficiency in adopting prudential regulations, currency management, monetary policy formulation, use of ICT, risk management and financial inclusion.

Bangladesh Bank Road Show

Very recently, BB organized a cross-country banking sector road show led by Governor and other senior management members. In this road show commercial and specialized banks came forward to connect and interact with the general population, providing information and receiving user feedback about their lending, deposit, remittance and payments service packages; building up in the general population literacy on financial services and awareness against money laundering and illegal hundi channels in remittance delivery. This major new campaign-mode drive in widening and deepening financial inclusion will be repeated, appropriately refined, in other regions of the country.


Sovereign Credit Rating

Sovereign rating for the first time by two international rating agencies- Standard and Poor's (S&Ps) and Moody's regarded Bangladesh as a reliable destination for international creditors and investors. In the global financial arena, the BB- and Ba3 sovereign credit ratings by S&Ps and Moody's respectively, ranked Bangladesh only behind India in South Asia. The rating takes into account macro-economic fundamentals, strong external liquidly, supported by resilience in apparel exports and remittances as well as external donor funding and an improving foreign exchange reserve. However, both the rating agencies have identified government's low revenue base and the country's narrow export base (very high dependence on apparels) as rating constraints.

Infrastructural Development

Infrastructural development is a necessary condition for economic development of any nation. Taking this into account, BB has launched refinance scheme of Taka 200 crore to allow banks and NBFIs to grant loans for solar energy, biogas and ETP sector. A participatory agreement has already been signed with 15 banks to refinance the ETP sector. Power generation under the Public-Private Partnership is about to take place. BB on its part has already established 10 kilowatt solar panel. Besides, 178 megawatt of electricity is already being provided to the national greed under 7 projects of Investment Promotion and Financing Facility (IPFF). BB has successfully negotiated for additional USD 250 million support for IPFF with the World Bank.

Human Resource Development

To improve the capability and professionalism of the employees, regular foreign training initiatives have been taken under the Central Bank Strengthening Project (CBSP). Reserve Bank of India will conduct training, Masters and PhD program to increase the capacities of the Research Department of BB. A MoU has already been signed with the IFC in this regard. BB is also utilizing the training facilities of local institutions including Bureau of Economic Research, Dhaka University for improving the research skills of its officials.

Poverty Reduction Strategies

In vision 2021, the current government has declared its vision of reducing poverty rate below 15 percent. Steps have been taken to achieve this goal by ensuring easy and hassle-free access to agricultural and SME credit. BB's SME loan under the refinance scheme has already been increased from Taka 100 to Taka 600 crore. Similarly, housing fund has been increased from Taka 300 crore to Taka 700 crore. However, BB does not encourage purchase of land through bank finance as it creates asset bubbles.

Improving Consumer Services

Necessary steps have been taken to make services at BB more consumer friendly. As part of it, cash department will be modernized over the near term. Steps have been taken to establish CCTV, helpdesk, separate counters for disabled, women and old customers, display board showing latest information


and citizen charter. Automatic note processing, sorting, banding and shredding machines will be provided at the Motijheel office of BB.

Easy and effective access to banking services for physically incapable people has been made mandatory by the BB through a recently issued circular. Banks, for this purpose, are directed to designate an official as 'Focal Point' at each branch of a bank. In conclusion, developing an inclusive financial system is considered to be a necessary element for achieving both high level of income and low level of income disparity, particularly in developing countries like Bangladesh. The relationship between the access to financial services and economic growth makes inclusive financial sector a major policy agenda in Bangladesh. After a long period of time, BB has opened up new avenues to reach the marginalized section of the society by assigning priority in including significant contributors to the economy particularly, farmers and small entrepreneurs. BB's initiatives of broadening and deepening financial inclusion will combat poverty by unblocking advancement opportunities for the disadvantaged poor, thereby fostering social inclusion and inclusive socio-economic growth. Over the near and medium term BB will continue its move towards strengthening financial inclusion as an economic war against poverty. BB will continue to work with other stakeholders including academia, CSOs, think-tanks, trade bodies to pursue its main strategy of financial inclusion for a more inclusive growth in addition to its participatory and prudent monetary policy formulation and implementation.


Mobilization of national resources*

Myself not being an accounting professional, my presentation on the conference theme, the role of chartered accountants in mobilization of national resources, will necessarily be an outsider's view. I would ask the professional accountants in the audience to bear with any lack of insider perspectives that they may notice in the presentation.

To begin with, why are we concerned about mobilization of national resources? We are concerned because we need to invest these resources towards faster economic and social growth. These investible national resources include income of households and businesses tapped by the government as the tax base; and the financial savings of households, farms and businesses tapped by investors as their financing sources. The government needs true, reliable accounts and financial statements of households and businesses for correctly estimating the base of taxation income. The savers feel safe in placing their savings only with those financial and nonfinancial businesses that have reliable accounts and financial statements with adequate and transparent disclosures. Small investors flocking in the capital market in huge numbers would benefit greatly with credible, properly disclosed financial statements of listed companies drawn up and certified by esteemed members of your professional community.

These are where the value of well-developed professionalism in your trade comes in, as accountants and auditors maintaining and certifying accounts and financial statements according to accepted standards. Adherence with local standards were once sufficient, but with globalization of trade and investments in intricate webs of cross border relationships, adherence to uniform international standards is now becoming unavoidably necessary.

Where do we Bangladeshis stand in efficiency of national resource mobilization? Unhappily, down close to bottom of global league table, with tax/GDP ratio at meager 9.2 percent in FY 10 after some improvement from 8.6 percent of FY 09. These levels look dismal against 19.5 percent tax/GDP ratio of neighboring India. The domestic saving rate in Bangladesh stagnates at around 20

*Keynote speech on 'Role of Chartered Accountants in Mobilization of National Resources', 9 August 2010.


percent of GDP, well below levels in our neighbors and other comparator economies. Only partly are these low levels attributable to low income, the main reason is poor and dubious accounting and auditing practices. Affluent households get off paying pittance as income taxes with dodgy financial disclosures; thriving businesses evade taxes understating income, even reporting fictitious losses. The widespread public perception now is that tax-payers, accountants, auditors and tax-collectors are acting in collective collusion depriving the government of due revenues; banks and financial institutions collude by lending to tax evading businesses based not on their declared weak balance sheets but on private knowledge about their actual financial health.

Are these practices of collective collusion in misreporting accounts and income actually rewarding us? Certainly not. Tax evading households and businesses get paid back in deficient, poor quality services from under funded public establishments, and end up paying additional sums in privately arranged services for security, garbage disposal and so forth. Businesses understating income to evade taxes cannot access capital markets with their disclosed supposedly weak financial statements, and crowd into banks and financial institutions for borrowing, pushing up interest costs to the perennially complained about high levels. FDI inflows languish as foreign investors hesitate about investments in the non transparent graft ridden environment, shy of joint ventures with local businesses having dodgy non transparent financial disclosures. The tax evading well off are thus paid back in the same coin, while the less well off population segments suffer with the most under high burdens of regressive indirect taxes like VAT and tariffs imposed due to low collection of direct taxes from the better-off. Investment and economic growth continue to lag below potential, just while the neighboring economies are powering ahead with better financial disclosures, higher resource mobilization and higher rates of economic growth.

For the reasons outlined above, I am looking forward to this conference today initiating a campaign in breaking out of the vicious circle of accounting and financial misreporting that is holding down resource mobilization, investment, economic growth and poverty eradication in Bangladesh. This would clearly be a very major undertaking in reeducating and motivating all of us as individuals, households, businesses and public authorities in transforming our individual as well as collective social behavior and practices. Urgency of the need for this campaign is just as great, with the country's Sixth Five Year Plan (SFYP) 2011-2015 targeting tax-GDP ratio of 12.9 percent by year 2015, to raise domestic investment to 32.5 percent of GDP and annual real GDP growth rate to 8.0 percent. Successfully brought about, the desired reforms in accounting and financial disclosure practices will lead to major acceleration in development of financial and capital markets channeling higher domestic and external investments into the real sectors, leading to faster economic growth and poverty reduction.

I would look forward to audit reports of chartered accountants on individual businesses, and to the Journal of the ICAB being informative, effective learning and motivational tools to this end for all of us. On behalf of Bangladesh Bank I promise you all co-operation, with open communication and consultation


channel for the ICAB in all aspects of this endeavor. The government is seriously considering enactment of a new law creating an oversight authority for the accounting profession. I am looking forward to ICAB to play role as an integral auxiliary in the new regulatory structure, for implementing in letter and spirit the evolving international best practices of accounting and auditing in Bangladesh; towards higher resource mobilization, higher investment, poverty eradication and eventual prosperity for Bangladesh.


APG Typologies Workshop 2010*

As the public agency, entrusted by our money laundering prevention and anti-terrorism statutes to put in place and maintain surveillance mechanisms to prevent and detect money laundering and terrorism financing activities, we at Bangladesh Bank, the central bank of Bangladesh are very happy that the APG regional AML/CFT Typologies workshop is being held at Dhaka. We have always been keen about exchanging experiences and upgrading skills in keeping our growing financial system and expanding external trade, workers' remittance and capital flows free from influences of money launderers and financiers of terrorism. Always keen on responding to the relevant UN conventions and FATF guidelines, Bangladesh has been an APG member from inception, serving in its steering committee for three terms.

Bangladesh was the first South Asian country to legislate a Money Laundering Prevention Act, in terms of which Bangladesh Bank put in place uniform KYC (know Your Client) procedures and suspicious transaction /cash transaction reporting procedures in banks and financial institutions. The updated 2009 Act in line with evolving international practices, when a new anti-terrorism Act with clauses prohibiting financing of terrorism was also legislated. Following these, insurance companies, capital market entities, and Non-Profit/Non-Government Organizations have also been brought under the purview of AML/CFT surveillance and reporting requirements. Training programs on a massive scale have been conducted throughout the country to familiarize the banking and financial institutions' staff in the reporting entities about the AML/CFT reporting requirements and procedures. Recently, a cross-country road-show was organized by Bangladesh Bank in collaboration with banks, to heighten awareness in the general population about issues in preventing and combating money laundering and terrorism financing.

Besides building up and maintaining the expanding AML/CFT database, Bangladesh Bank has also been forging contacts and cross-border liaisons with counterparts in other jurisdictions, because money laundering and terrorism financing activities typically stretch across state boundaries. A number of Memoranda of Understanding (MUs) have already been concluded with Financial

*'APG Typologies Workshop 2010', 26 October 2010.


Intelligence Units (FIUs) in other jurisdictions; contacts and correspondences in terms of these MUs are underway in a number of specific cases.

I am confident that the sessions of this typologies workshop will be excellent occasions for participants for exchanging ideas and experiences across countries, deepening their perspectives on vulnerabilities to money laundering/terrorism financing risks and the ways of addressing them. I take this occasion to express our gratitude to the APG and our development partners for their continuing support and assistance in building up our capacities in combating and preventing money laundering and terrorism financing activities. I would like to thank APG for organizing the important regional workshop at Dhaka, and I must recall also that we owe a debt of gratitude to our honorable Prime Minister and two of her senior cabinet colleagues the honorable Finance and Law ministers for gracing the event with their personal presence. This certainly reflects a very high level practical commitment for addressing the issues related to AML/CFT by her government. I wish the workshop the best success and I, of course, wish the delegates from abroad a pleasant stay in Bangladesh, with happy memories to take home in their return journeys. I want to thank all the agencies, both national and international, involved in successfully organizing this regional workshop. Thank you all for your patient attention.


Enhancing Economic Resilience,

Sustainability and Inclusive Growth*

At the individual enterprise level, resilience requires awareness of vulnerability to risks from sudden sharp changes in market trends and business environment, and preparedness of coping with such changes. In the recent global financial crisis many major globally active 'too big to fail' financial institutions were caught unprepared to respond, deepening the fallouts of the crisis. It was only after onset of the crisis that stress testing drills for assessing vulnerabilities and contingency planning for crisis situations are getting greater attention.

In general, resilience at the enterprise level is better where mixed bags of a number of business lines are pursued instead of excessive dependence on too few business lines even if these are currently booming ones. Those pursuing baskets of diverse business lines can compensate for crisis-led downturn in some of these with upturns and new opportunities in some others. During the global financial crisis, banks in Bangladesh were in a liquidity glut, with swelling workers' remittance inflows against slowdown in investment and export manufacture related imports. Guided by BB's financial inclusion thrust, banks utilized much of this liquidity in expanding lending to under-served sectors including agriculture and SMEs, usefully supporting increase in output, income and internal demand.

In the global financial crisis, problems in a small number of overly large globally active 'too big to fail' financial institutions severely tested the resilience of the global financial system. Resilience of financial markets and systems is best safeguarded by preventing excessive concentration of business in a few dominant oligopolistic entities, instead maintaining an environment where multiple entities pursue diverse ranges of business activities without dominant systemic influence on particular business lines or segments. Sectoral regulators and competition authorities have proven negligent in creating and ensuring such environment. It is time now to pay corrective attention in this area. Basel based forums of global experts are bringing up modalities of cross-border co-operation in effective'collegiate' supervision of large globally active financial institutions; it

*ADB Regional Forum session on 'Lessons for the Way Forward: Enhancing Economic Resilience, Sustainability and Inclusive Growth', at ADB Headquarter, Manila, Philippines, 4 November 2010.


may be well worthwhile to explore options for preventing emergence of oversized 'too big to fail' entities in the first place.

In respect of growth strategies for national economies, resilience in coping with abrupt trend shifts or crises in the global scene hinges importantly on avoiding excessive dependence on any single strategic option (like export-led, commodity based, labor intensive manufacture based or high technology based strategy); a balanced mix of workable strategies is a better safeguard for sustained overall growth, compensating for cyclical or crisis driven downturns in some areas with upturns in others.

For Bangladesh, apparels comprising four-fifth of the export basket, and the bulk of it going to North American and European markets now beset by demand slowdown, are factors limiting resilience; now being addressed with thrusts into new export products, and new markets.

Heavy import dependence for essentials of day to day survival like food weakens resilience, risking crisis in events of global output shortfalls and disruptions in global trade. Maintaining imported buffer stocks in sufficient volume is costly. To mitigate the risks from global shortages and trade disruptions, Bangladesh has focused attention on maintaining adequate domestic production of essential food grains, extending support to growers in their access to needed inputs and agricultural credit.

It is now widely perceived that climate change associated with anthropogenic global warming is increasing the frequency of floods, cyclones and other natural disasters; posing survival and livelihood risks for population across vast regions of the globe. Bangladesh is well known for her resilience to natural disasters of floods, cyclones and coastal inundations; building up over the years capacity in the government's disaster management set ups for emergency rescue and subsequent rehabilitation of the affected population groups. The survival and livelihood threats from global warming driven sea level rise are however immense; far beyond means of low income countries like Bangladesh to cope with.

Resilience to climate change threat will require coordinated global response, with adoption of environmentally sustainable practices in life-styles and economic activities. Major part of the costs involved for developing countries in these efforts will need to be borne by developed economies with wealth accumulated from practices that have been degrading the environment since the industrial revolution, causing global warming.

Sustainability

Appropriate public policies and major investment commitments from public resources are essential in responding to environmental sustainability challenges. Sustainability initiatives in developing countries like Bangladesh will require major resource support from developed economies. Contributions from the internationally active private philanthropies will be useful supplements, particularly in awareness raising and promoting sustainable livelihood practices in broad masses of general population.

Financial sector regulators can adopt policies and market development


measures to mitigate the risks and to lower the financing costs of sustainability projects. Public subsidy support including fiscal incentives like tax / duty waivers will enhance viability of the sustainability projects; but credit policies of central banks can also help in easing their access to and costs of borrowing. To this end, Bangladesh Bank is allowing lending institutions access to refinance lines against loans to sustainability projects. Also, in developing financial markets with limited menu of financial services on offer as in Bangladesh, emergence of new financial services like venture capital and private equity for start-up sustainability (and other) projects can be usefully supported with appropriate policy steps.

Financial sector regulatory authorities in developing economies should adopt sustainable, harmful emission minimizing internal processes and practices in their own establishments and installations; and should require all banks and financial institutions to do so as well. BB has initiated steps in this direction installing some solar power panels for illumination at the head office, and asking banks to install solar power panels in bank branches as a condition of grant of new branch licenses. The logical next step would be to require banks and financial institutions in their turn to insist on environmentally sustainablepractices in their client businesses/projects.

Inclusive growth

Strategy and policy pronouncements of developing economies like Bangladesh can clearly articulate commitment to inclusive economic growth to open up blocked advancement opportunities for the disadvantaged population segments of the society. The longer term Perspective Plan and sixth Five Year Plan of GOB articulate this commitment.

Inclusive growth aims at equality of opportunities rather than equality of income. With concern for both quantity and quality of growth, it has the important additional dimension of social empowerment of the disadvantaged population groups in terms of their human development and advancement opportunities. The inclusive growth orientation of development policies of GOB is evidenced in the large social expenditure content (over a third of total) of annual national budgets, with steadily increasing poverty focused expenditure allocations for health, education and social safety net.

BB's thrust on fuller, deeper financial inclusion of all population segments and all productive economic sectors is supporting and complementing the GOB's thrust for inclusive growth. BB's financial inclusion initiatives are steering banks and financial institutions into increasing engagement in lending to the under-served/unserved economic sectors and population groups, including micro and SME entrepreneurs, agricultural and other rural and urban farm and non-farm productive activities. Banks and financial institutions are being motivated into deepening and broadening financial inclusion both as their CSR obligation andas new opportunities of viable business in new client bases. Refinance support line from BB is also being made available to lending institutions in transient liquidity needs against lending to the thrust areas in financial inclusion.


Bangladesh 2030: Strategy for Growth*

Long term perspectives are powerful antidotes against speculative get-rich-quick short- sightedness in business and election cycle based short-sightedness in politics, and can indeed greatly aid stability and sustainability of the growth and development processes. Bangladesh government has already drawn up a perspective plan for the next ten years; it is very heartening now to see the business community coming forward in envisioning our growth path over another ten years into the future, up to 2030. This is certainly well crafted strategic move towards developing a synergy towards desirable growth momentum. I, wholeheartedly welcome this public-private partnership in our national thought process on the growth perspective.

The government's Perspective Plan 2020 aspires for making Bangladesh a middle income country by 2020, which will require crossing the per capita Gross National Income (GNI) of USD 976. Our recent GNI growth trajectory shows promise that Bangladesh may cross the USD 976 threshold by as early as around 2014, but per capita GNI will need to be sustained at this or higher level for at least four years before formal recognition of transition to a higher income category. Formal graduation of Bangladesh to middle income country status may, therefore, not materialize much earlier than the timeline projected in the Perspective Plan.

The DCCI concept paper envisions Bangladesh within 30 largest economies in GDP size in terms of PPP by 2030, from the current position of 48th. This ranking by GDP size is not a very relevant as measure of wellbeing of the population; small population countries like Kuwait, UAE, New Zealand, and Luxembourg, behind Bangladesh in ranking by GDP size, are affluent while populous Bangladesh is still poverty ridden. The per capita GNI based ranking and grouping into low, middle and high income countries is the widely used clearer measure of how well-off individual economies are. Becoming a lower middle income country by 2020 will be no mean achievement, although our ultimate aspiration further into the future would be yet higher, the attainment of prosperity for all our people.

*'Bangladesh 2030: Strategy for Growth', organized by Dhaka Chamber of Commerce and Industry (DCCI), 7 December 2010.


For 2030 Bangladesh may consider setting sights at crossing the next threshold to 'higher middle' income bracket, with per capita GNI equivalent to USD 3,946 or higher at current prices. With an estimated 2030 Bangladesh population of 178 million reported in the concept paper, crossing into the higher middle income bracket will require raising our GNI to equivalent of around USD 703 billion at current prices by 2030, from current level of about USD 107 billion.

Is this realistically attainable? In my opinion the answer would be a definitive yes, on a number of considerations. Firstly, we can expect our comparative advantage of ample supply of cost competitive young manpower pool to continue over the coming decades, provided that we keep upgrading and updating education and skills of the manpower pool. Secondly, room for substantial productivity enhancement in agriculture, fishery, dairy output is by no means exhausted; anecdotal reports of rural farmers active in developing new breeds of rice capable of withstanding drought, salinity and flooding are heartening examples of adaptive ingenuity responding to climate change threats. Thirdly, as the DCCI concept paper points out, our current GNI estimates leave out an informal economy of substantial size. The informal economy will progressively integrate into the formal reported economy, pacing up growth in GNI over the coming years.

Major deficiencies in physical infrastructure are much brooded over as serious growth constraints; we need to remember that these are at the same time major investment and growth opportunities, provided we pursue right policies to crowd in domestic and external financing. Climate change threat is likewise a window of opportunity of breaking into new, promising growth areas in renewable energy generation and in innovating environmentally sustainable processes and practices in broad ranges of other productive activities. The key to success in graduation into higher middle income status for Bangladesh by 2030 will be in unleashing and utilizing the creative energies of our entire population; opening up blocked advancement opportunities for the disadvantaged population segments with inclusive growth policies. Bangladesh Bank's recent campaign for broader, deeper financial inclusion supported by intensive employment of IT aims at contributing to the inclusiveness of economic and social growth in the country. You will be happy to know that we have been able to open about ten million new bank accounts for the farmers and extreme poor for transparent disbursement of agricultural subsidy and wages for employment guarantee scheme as part of financial inclusion. This has been greatly enhancing our domestic demand which has helped us cope well with ongoing global financial crisis. As a result, we got very good sovereign ratings from Standard and Poor's (S&Ps) and Moody's. Besides maintaining macroeconomic stability, the main role of the government on the path of attaining higher middle income country status by 2030 will be in continuing high fiscal outlays for human development targeted predominantly tothe lower income groups for rapid poverty eradication; substantial R&D outlays particularly in environment friendly agriculture, energy generation and manufacturing; continuous skill upgradation of our abundant young manpower pool, and maintaining congenial, competitive policy environment for local and foreign private sector entrepreneurs. We should also continue to take advantage of the opportunities arising out of emerging regional co-operation in many fields, particularly in the areas of infrastructure


and other connectives. Bangladesh Bank will be proactive in measures needed for financial sector stability and financial markets development responding to newly emerging needs in the growing economy. In addition, Bangladesh Bank intends to drive swift IT up-gradation in the financial sector, substantially contributing towards achieving digital Bangladesh. In fact BB has already traveled a long way in the path of automation of the banking sector; including setting up of automated clearing house, online CIB, ERP, e-recruitment, e-tendering, mobile phone banking, national payment switch and e-payment gateway. I am sure all these innovative banking initiatives will enhance the pace of e-banking and e-commerce leading to faster pace of inclusive economic growth, which is the ultimate goal of Digital Bangladesh as captured in Vision 2021 strategy.

Let us expect that the government and other major stakeholders will engage extensively and intensively in the consultation processes to firm up a perspective plan, perhaps by the end of 2011.

Nobel Laureate poet Tagore thought 'One can put as much water as is the size of the pot.' This is also true for a nation. The larger the dream, the bigger will be the prosperity of the nation. Therefore, let us think big and achieve high. In this month of Victory, let me salute the martyrs of the War of Liberation for their supreme sacrifice.

Challenging the Injustice of Poverty*

The launching of Professor Rehman Sobhan's new treatise on combating poverty in South Asia is a landmark event for all of us concerned about persistence of poverty and deprivation in South Asia even though overall economic growth in the region has gained substantial pace. The rising tide of growth is lifting boats of the better-off fast enough, but not doing all that much in lifting the leaking, tottering boats of the poor with little in asset ownership and advancement opportunities.

Comprehensive in its scope and impressive in its rigor, Professor Rehman Sobhan's treatise starts off from the by now well recognized premise that mere access to minimal subsistence income does not ensure lasting success in overcoming poverty; the deprivations in advancement opportunities need to be redressed by meaningful social and financial inclusion and empowerment of the excluded poor, adopting an inclusive approach in economic and social growth efforts. Mapping out the interplays and conflicts of interests of different social groups, Professor Rehman Sobhan's treatise sketches in clear relief the multifaceted challenges in social and economic empowerment of the excluded poor embedded in the societal power structures from grass roots level upwards.

In the space of just around four hundred pages, Professor Rehman Sobhan gives us a valuable overview of the experiences and lessons from the extensive range of rural development and poverty reduction approaches, programs and projects undertaken in South Asia over the past several decades by governments and civil society initiatives, including those supported by external development partners. Illuminating insights and guidance for the way forward keep emerging as the analysis and discussion progresses, in the key areas including inter alia access to market participation on fair terms, ownership of physical assets and financial equity, publicly funded services in health, education, skills acquisition and social safety net.

Stressing on reforms in budgetary policies, the author rightly identifies the budget-making process as a way to realistically assess the revealed intentions of incumbent governments towards poverty alleviation since all the policies have to


*Launching event for 'Challenging the Injustice of Poverty' by Professor Rehman Sobhan, 31 January 2011.

be operationalised through the annual budget. However, public expenditures on poverty alleviation are opaque in this region and usually allocated under broad spectrum budget heads like 'Social Sector', 'Safety Net', 'Transfer Payments' and so on. The author rather argues that targeting under these broad expenditure heads conceals the actual share of resources directed towards the excluded.

Professor Sobhan stresses on financial inclusion as an effective tool for combating poverty and ensuring broad-based inclusive economic growth in South Asia. In Bangladesh, nearly four-fifths of the adult population receives basic financial services from regulated and supervised financial institutions, MFIs and cooperatives. To cover the remaining one-fifth, Bangladesh Bank is encouraging cost saving innovative partnerships of financial institutions, MFIs and mobile phone companies. Bangladesh Bank's financial inclusion initiatives provide strong support for adequate lending for agriculture, SMEs, renewable energy and other productive sectors. I am happy to learn that Bangladesh Bank's innovative initiative for financing sharecroppers is well appreciated in this treatise.

The book revolves around the idea that the under-served poor and marginalized should be provided enough space so that they can move towards higher levels of markets. A co-operative effort by communities can develop institutions allowing them access to better facilities for augmenting their livelihoods through better education, training, healthcare etc. The poor need to be ensured free access to credit, proper market for selling their goods and better returns on whatever they produce through value addition process.

I believe anti-poverty campaigners at all levels including strategists, policy planners, activists and researchers in governments, official development partners, private philanthropies and civil society initiatives will find the insights and guidances valuable. Although the analyses and discussions in the treatise are in the context of South Asia, the resultant insights and guidances are of general relevance to understand and eradicate poverty in other regions as well. I believe therefore that the treatise will be valued as a useful guidebook in combating global poverty, not just poverty in South Asia.

We owe Professor Rehman Sobhan, my respected teacher, our deep debt of gratitude for this valuable contribution, the distilled essence of his work on poverty issues spanning several decades. I wish him a long life as important beacon in our path ahead for eradication of poverty and deprivation. At the very end, I would also like to express my deep appreciation to Nobel Laureate Professor Amartya Sen for his kind presence.



Issues of Current Concern in Interest Rate, Liquidity, and Capital Market Recovery*

Inflation and interest rates Point to point CPI inflation in Bangladesh has reached 10.7 percent in April, driven by global commodity prices and strong domestic credit growth (29.0percent as of March 2011, far in excess of expected FY11 nominal GDP growth of about 18 percent). The core (non-food) inflation susceptible to monetary policy actions will edge up from the low 4.0 percent, due to the recent energy price revisions. With inflation high and rising, banks cannot attract deposits at low interest rates from individuals, households and businesses; and rising deposit interest rates necessarily push up lending interest rates. Imposing ceilings on deposits and lending interest rates will worsen matters, hurting growth in deposits and the volume of available credit. We need only to look back to the experience with the regime of directed credit at prescribed interest rates in the nineteen seventies and eighties, when inflation remained high and mis-declaration and diversion in credit use was rampant.

Only by bringing down credit expansion to levels commensurate with nominal growth of the economy can inflation level be brought down, in turn bringing down the deposit and lending interest rates. The lending rate caps still remaining on credit for some essential and productive purposes are proving counter productive, reducing credit access for these purposes, creating a sense of liquidity crunch.

Fighting down the rising trend of inflation is now a key concern in all economies, developed and developing. Only USA & UK are still to raise interest rates from the lows of the global slowdown due to their still flagging economic growth; the ECB of EU has raised its policy interest rate (ECB does not prescribe interest rates for customer lending and deposit in banks). The lending and deposit interest rate ceilings in China mentioned in FBCCI's press bulletin are remnants of their communist era practices; and China has acted far more aggressively in fighting down their inflation rate, which is only half that of Bangladesh. Since January 2011, China's PBC has raised interest rates four times while BB has done so twice. RBI has raised Indian policy interest rates nine times from January 2010, against thrice by BB.

* A Discussion on 'Issues of current concern in interest rate, liquidity, and capital market recovery', 30 May 2011.


Bigger businesses in Bangladesh can contribute significantly in easing the rise in domestic lending interest rates by leaning less on local banks for term financing of their investment projects, accessing foreign borrowings for substantial portions of their term financing needs. This will also ease depreciation pressure on exchange rate of Taka, and help avoid building of asset liability maturity mismatch in books of local banks.

Rise in deposit interest rates is already showing pick up in deposit growth, improving market liquidity and the volume of loanable funds. The business community and BB are not adversaries but working partners on path of stable growth for eventual prosperity. We believe the business community is fully aware of the necessary trade-offs in short term adjustment pains for stable, sound growth over the medium and longer term. In the current local and global inflationary environment it is impracticable to continue with lending rate caps imposed during the global downturn, but BB is closely monitoring interest rate practices of individual banks, to weed out practices of tendencies unfair or undesirable from consumer protection viewpoint. BB will look into specific grievances of individual businesses in this respect for prompt redress.

A few words on BB and the capital market. The assertion in FBCCI's press bulletin that BB did nothing to restrain banks from capital market investments beyond statutory ceiling while stock prices were rising is incorrect; the bulletin itself mentions that BB issued advice to banks in April 2010. It is curious that those now blaming BB for inaction were themselves actively lobbying to pressurize BB to prolong compliance timelines for banks.

BB required banks to set aside their 2010 capital market investment gains for adjustment of subsequent losses. Banks are free to make their business decisions about investment of the post-adjustment remainders in the capital market, there can be no question of coercing them to do so by BB directive.


Modeling and Forecasting for Inflation Targeting*

It is my great pleasure that Bangladesh Bank (BB) is hosting this joint BB-CCBS regional seminar on modeling and forecasting for inflation targeting, a key objective at the core of central banking. We are deeply grateful to the CCBS of Bank of England for providing the two key resource persons for holding this event, who have taken the time and trouble to fly in from London for this purpose. I was heartened to learn that this kind of collaboration of BCBS and BB in jointly holding regional training seminars predates my tenure at BB; and I look forward towards continuation and further deepening of this relationship in the coming years.

BB or other central banks in our immediate neighborhood are yet to explicitly embrace inflation targeting. Of course, inflation is as much a key concern for BB as for any other central bank, but because effective monetary policy transmission channels in the domestic money and credit markets at early stage of development are still inadequate, BB's monetary programs seek to influence inflation indirectly through the intermediate target of broad money growth. Policy challenges in grappling with inflation are however the same, regardless of whether inflation is targeted directly or through an intermediate monetary aggregate. These challenges include the growth-inflation trade-off to be balanced optimally, the limited impact of monetary policy actions on supply side factors, and speculators amplifying and distorting demand pressures in global commodity markets. Reliable forecasting of time paths of global and local inflation in the face of such complexities require continual upgrading of analytical skills in central banks, including interalia in modeling and forecasting. A key objective in BB's medium term strategic plan is the strengthening of capabilities BB staff in these areas, and we are pursuing this with a comprehensive multi-pronged action agenda, drawing upon available domestic and external training facilities, with helping hands from other central banks and multilateral institutions like IMF, World Bank and ADB. The regional seminar being inaugurated today is an element of this action agenda.

*Inauguration of the BB-CCBS 'Modeling and Forecasting for Inflation Targeting' regional seminar, 13 June 2011.


I hope and wish that the BB staff participating in the seminar will engage intensively with the resource persons and the visiting participants from other central banks in an exciting, stimulating learning experience; building up contact and experience exchange links stretching far beyond the seminar duration.


Feasibility Study of PPP Projects*

For many years, Bangladesh has been unable to reach its full potential due to the lack of adequate infrastructural facilities. Although we have seen notice able improvements in recent years, much still remains to bad one. The infrastructure financing needs of Bangladesh amount to over USD 28 billion in additional investment still 2015.

In many countries this infrastructure financing gap is being bridged through the use of Public-Private Partnership or PPP programs. The partnership shave proven to be effective in a multitude of different economic sectors. The infrastructural capacity of countries that have been able to successfully implement PPP projects has increased exponentially in recent years. But we have not done much in gaining that capacity.

Considering the necessity of infrastructural developments by all means, Bangladesh Bank has set-up the Investment Promotion & Financing Facility (IPFF) Project with assistance of the World Bank for the effective financing and co-ordination of PPP Projects. The IPFF project sets in motion Bangladesh Government's PPP mandate by facilitating financing requirements and enhancing capacity to develop and implement PPP projects all over Bangladesh.

Today's event is one in a series of workshops and seminars sponsored under the IPFF Project to facilitate capacity development of the officials involved in implementing of PPPs in Bangladesh. Today's training is expected to improve their existing knowledge and skills to assess the feasibility of PPP projects.We look forward to an engaging knowledge sharing session to be led by the experts from the Institute of Policy Advocacy and Governance (IPAG).This is a well known institute, which has organized many such events not only in Bangladesh but also beyond our border. I am pleased to see that Bangladesh Bank and the Government have decided to utilize their expertise for the capacity building of our officials.

Finally, I would like to thank all concerned individuals involved in the preparation of this workshop. In particular, the support of the Honorable Prime Minister's Office has been remarkable and I thank the Principal Secretary, Mr. Md. Abdul Karim for his continued interest and support in this regard. Also thanks to SK Sur Chowdhury, PD, IPFF & his team. I would also like to thank the officials for their enthusiasm and participation in today's event.

*'Training on Feasibility Study of PPP Projects' organized by IPFF, Bangladesh Bank, 15 September 2011.


*Inauguration of PMO-IPFF workshop on 'Project Identification and Feasibility Study',16 September 2011.

Project Identification and Feasibility Study*

Public-Private Partnerships are by now a widely adopted mode of physical infrastructure investments in both developed and developing countries. Recent worldwide heightened concerns about sustainability of public debt levels in advanced economies indicate that PPPs are likely to be the dominant mode of infrastructure investments in the coming years everywhere. The development strategies and investment programs of Bangladesh government already include PPP in a major role in much needed new infrastructure investments.

Structuring and implementation of infrastructure projects in the PPP mode is more complex than projects financed solely by the private or the public sector; and public officials associated with PPP projects need to be equipped with knowledge and skills in project identification and appraisal. Today's workshop, a joint initiative of Prime Minister's Office and the WB supported Infrastructure Project Financing Facility (IPFF) at BB, is part of efforts of disseminating these skills among public officials. I take this opportunity to thank World Bank for their continuing support and engagement with the IPFF at BB, and also to thank the Prime Minister's Office for co-sponsoring this workshop with the IPFF, which has already built up a track record of successfully holding familiarization and training events and workshops like this, mobilizing appropriate teams of resource persons from home and abroad.

I am looking forward to the workshop sessions this afternoon and evening being lively, interactive and instructive; and I hope the workshop today will invigorate and energize all participants in furthering momentum of progress with PPP infrastructure project initiatives.


Commodity Price Volatility and Economic Diversification*

Policy maker's perspective on commodity price volatility, an issue of major relevance for Bangladesh. First, let me start by pointing out two important facts about Bangladesh. First, the country has been steadily growing at about 6% plus per annum for the past decade and is approaching lower middle income status. Moreover growth has been inclusive with little change in inequality indicators over this period. As a result poverty has halved in one generation - from 59% in 1990 to 31% in 2010. However this impressive progress would have been even greater had there been less global commodity price volatility, especially food price volatility. Cross-country evidence reveals that food price pass-through in Bangladesh is one of the highest in the world, with domestic food prices closely tracking global, and more specifically, Indian prices. End August 2011 prices of wheat flour, soybean oil and sugar in Bangladesh stood 18, 45 and 38 percent higher respectively than at the same time of the preceding year.

Being an importer of fuel oils Bangladesh faces direct balance of payment pressures from oil price spikes, immediate pass-through into domestic prices raises domestic inflation, while delayed pass-through raises fiscal subsidy burden. Food price spikes are particularly hurtful for the urban poor and lower middle class and in rural areas for the extreme poor who have little land to grow their own food. The need to subsidize subsistence consumption of the low income population segments widens fiscal deficits. Reducing or limiting vulnerability to commodity price volatility remains therefore a priority, to protect purchasing power of consumers and competitiveness of domestic output.

There are three approaches that we are taking to deal with volatility. They relate to pro-poor growth, economic diversification and strengthening safety nets.

a) Sustained high overall economic growth is being pursued consistently, to reduce vulnerability to price volatility by enhancing availability as well as

*Presentation on 'Commodity price volatility and economic diversification, financial development, inclusive growth in LICs: a policy makers' perspective' at IMF Headquarter Washington D.C., USA, 21 September 2011.


affordability of consumption and investment goods. Government's programs and policies seek to accelerate inclusive economic growth, focusing public expenditure outlays in developing the social and physical infrastructure, crowding in private investments in output activities. The government's inclusive growth efforts are being supported by Bangladesh Bank's (BB's) financial inclusion drive engaging banks in reaching out with credit and other financial services to productive pursuits in under-served areas like small landholder/tenant farming, SMEs, renewable energy and other environmentally benign ventures. To facilitate cost effective reach out by banks to these newer client segments, branch-based financial service delivery is being supplemented by mobile phone/smartcard based remote delivery, as also by on-lending/cofinancing partnerships of banks with locally active regulated Micro Finance Institutions (MFIs). Underpinned by embracing of Corporate Social Responsibility (CSR) obligations in corporate goals and objectives of all banks and financial institutions, the financial inclusion drive has successfully engaged all commercial banks (state-owned, private and foreign) in agricultural financing; more than nine million new bank accounts of rural farmers were opened in FY 11, and around a third of FY 11 agricultural financing of private banks took place through bank-MFI partnerships. Consequent to these sustained, concerted efforts poverty decline has maintained pace; indicated inter alia by buoyant uptrend in rural wages. Annual real GDP growth rate is on rising trend, coming close to seven percent in FY 11 and poised to go up further in the coming years. Social development indicators of Bangladesh are in several respects better than in her faster growing neighbors. Stocks of public debt and private sector debt at 37.8 percent and 43.3 percent of FY 11 GDP indicate moderate, sustainable leverage levels in the economy.

b) Diversification of domestic production base is being accorded high priority towards reducing vulnerability to import price volatility. Alongside increased extraction of natural gas and coal resources, development potentials in solar, bio-mass and other renewable energy resources are being explored and exploited. Besides food grains, output growth in dairy, poultry & fishery produces, spices, pulses, oilseeds, sugarcane etc. are being promoted and supported to bring down import dependence, the textiles and apparels export sector expanded backward linkages over the recent past, substantially reducing and shifting import dependence from fabrics and yarns to raw cotton and other textile fibers.

c) To mitigate shocks from sharp price spikes in essential food grains the government maintains strategic reserves of public stocks of rice and wheat, procured internally and externally. The South Asian regional forum SAARC has a resolution of maintaining a regional strategic food grains reserve; but its operational modalities remain yet to be thrashed out. These stocks are used to stabilize prices as well as to distribute to the extreme poor through


targeted transfers. In addition to food based transfers, the government has significantly increased its allocation for cash based safety net programs.

Having outlined these three strategies let me also point to some limitations. The scope of efficient output diversification is of course limited, feasible only in unexploited natural resources (minerals, fuels etc.) and in commodities with some comparative advantage in domestic production. Import dependence and the attendant vulnerability to price volatility will therefore persist for many commodities that are not competitive for domestic production. Maintaining substantial strategic reserves in commodities is costly and not easily affordable for LICs like Bangladesh; mistimed procurement steps for the strategic reserves can actually accentuate instead of dampening price spikes. It is therefore important that adequate and effective market disciplines are in place in global trade practices in commodities, to limit volatility and to mitigate its adverse effects. Let me turn to this issue now.

Mainstream global financial system in aberrant role of stoking commodity pricevolatility: Commodity futures markets originated with ostensible purpose of mitigating shocks of price volatility from climatic adversity related and business cycle related supply shocks. In the recent past decades excessive expansion of global liquidity from loose monetary policies in some major advanced economies led their banks and financial institutions increasingly into position taking and hectic trading in commodity futures. There are several studies (e.g., Chapter V, Trade and Development Report 2011, UNCTAD) clearly bringing out that this engagement of banks and financial institutions in commodity futures ('financialization' of commodity markets) for speculative profits is actually stoking up rather than mitigating commodity price volatility. Given that the speculative profits from commodity futures positions come at the expense of hard-up consumers or of their governments supporting subsistence consumption, LICs like Bangladesh view this role of banks and financial institutions in commodity futures as altogether unsavory and undesirable. The first best remedial option would be the reversal of super loose monetary policies in USA and Europe; whereupon rising interest rates would pull banks and financial institutions back from speculative position taking in commodity markets to their role of traditional lending. Neither USA nor Europe being now in a position to tighten monetary policies, there is a compelling case for the second best option of global imposition of the Volcker Rule of prohibiting banks and financial institutions from proprietary trade of position taking in commodity futures.

Madame Chairperson, please allow me to point out that from the run up to the global financial crisis and its aftermath it is amply evident that purely private gain oriented amoral corporate goals and objectives of the mainstream banks and financial institutions in the global financial system have led financial innovations astray; into obsession with quick big gains from commoditizing, mislabeling and misselling opaque packages of credit and its associated risks; traditional relationship based lending giving way to mechanical and impersonal


credit score based lending to be quickly securitized and off-loaded to capital markets. This frenzy ended up overleveraging and bankrupting households and businesses, leaving productive and employment generating small businesses starved of credit. Complaint about banks in mature advanced economies not financing job creating small businesses are now frequent and loud, indicating financial exclusion of lower income population segments and their productive pursuits. Large globally active banks simultaneously declaring huge profits and massive job retrenchments are similar recent symptoms of amoral social insensitivity in these institutions.

What is the way forward towards commodity price stability and financial stability? In this global context the financial development vision adopted in Bangladesh is one of the mainstreaming financial inclusion within the commercial banking system promoting and supporting inclusive growth with fuller financial inclusion of all productive pursuits in all population segments, while discouraging growth in lending for speculative profit seeking in unproductive pursuits. At Bangladesh Bank we embarked on the process of ingraining this vision of financial inclusion in the financial sector by first issuing guidance for mainstreaming of Corporate Social Responsibility (CSR) obligations in institutional goals and strategies of all banks and financial institutions. With this alignment and orientation of corporate ethos in the financial sector with their social and environmental obligations, banks are now spontaneous and proactive in innovating efficient, cost effective modes of reaching out to the excluded and underserved population segments. We believe that the approach of financial development and inclusive growth adopted in Bangladesh is of broader relevance beyond her borders; and that global success in maintaining broad-based inclusive economic and social growth along with commodity price stability and financial stability hinges urgently on similar reorientation of corporate goals and objectives of all banks and financial institutions in all jurisdictions, from sole pursuit of purely private gains to proper alignment with their social and environmental obligations.


Diaspora Bond for Mobilizing Foreign Savings*

Bangladesh has emerged as one of the promising avenues for promoting diaspora bonds with steady, resilient economic growth over the past few decades; remittance emerged as the major source of foreign exchange reserves, large pool of economically active younger population group, resilient banking sector, fast growing mobile telephony and so on. The rationale behind diaspora bonds is twofold. For the countries, diaspora bonds represent a stable and cheap source of external finance, especially in times of financial stress. For investors, diaspora bonds offer the opportunity to display patriotism by helping their country of origin. Furthermore, the worst-case scenario for Diaspora bonds is that debt service payments by the issuer are in local rather than hard currency. But because Diaspora investors often have liabilities in their country of origin, they are likely to view the risk of receiving payments in local currency with much less trepidation than would non-diaspora investors.

The government of Bangladesh has two US Dollar bonds ('USD Premium and Investment bonds') in issue, mainly targeting the Bangladeshi Diaspora abroad but open also for investment by any non-resident individual or institution regardless of nationality. Available on tap through banks in Bangladesh authorized to deal in foreign exchange or their branches and correspondents abroad, the 3 year Premium and Investment Bonds fetch interest in US Dollar respectively at 7.5 and 6.5 percent annual rate at maturity, the interest on Premium Bond is payable only in equivalent Bangladesh Taka. Premature redemptions are permissible, at interest rated lowered by 0.5 percent for each year short of maturity.

Total outstanding balance of the two bonds stood at USD 149.2 million as of end-August 2011. The sale volume remains modest in absence of aggressive marketing, another likely reason being that the bonds are not freely tradable, though useable as collaterals. Sales restrictions on such foreign bonds in the US

*Seminar on "Diaspora Bonds: Operational and Implementation Challenges", held on 22 September 2011 at the World Bank Head Quarter, Washington DC


and other advanced Western countries hosting the better-off segments of Bangladeshi Diaspora may also be among the reasons.

Bangladesh's growth aspirations and the recent sharp pick-up in her real sector investments require higher investment levels than can be mobilized from domestic savings; and Diaspora bond issue is a promising fund mobilization option both for the government and the private sector. Bond issuance abroad is among the options under consideration for financing the government's infrastructure investment projects (including those in PPPs) in power generation, toll bridges, toll roads etc. that will generate future income streams to pay off debts and other costs. Ring fencing of revenues for debt repayment should make these bonds attractive to the Diaspora and other non-residents, individual and institutional.

While dealing with license applications for new banks, Bangladesh Bank will consider prioritizing applications proposing external fund raising by issuance of Diaspora bonds for long term financing of local private sector investment projects. Given Bangladesh's current sovereign rating (BB-) with stable outlook, we expect borrowing costs in external bond issues to be bearable, not far from costs of sovereign borrowing. Bangladesh will of course welcome any help that the World Bank group may offer in issuance of Diaspora bonds.


Financial Development and Inclusive Growth

in Bangladesh*

In Bangladesh, government programs and policies seek to accelerate inclusive economic growth, focusing public expenditure outlays in developing the social and physical infrastructure, crowding in private investments in output activities. The government's inclusive growth efforts are being supported by Bangladesh Bank's (BB's) financial inclusion drive engaging banks in reaching out with credit and other financial services to productive pursuits in under-served areas like small landholder/tenant farming, SMEs, renewable energy and other environmentally benign ventures. To facilitate cost effective reach out by banks to these newer client segments, branch based financial service delivery is being supplemented by mobile phone/smart-card based remote delivery, as also by on-lending co-financing partnerships of banks with locally active regulated Micro Finance Institutions (MFIs). Underpinned by embracing of Corporate Social Responsibility (CSR) obligations in corporate goals and objectives of all banks and financial institutions, the financial inclusion drive has successfully engaged all commercial banks (state-owned, private and foreign) in agricultural financing; more than nine million new bank accounts of rural farmers were opened in FY 11, and around a third of FY 11 agricultural financing of private banks took place through bank-MFI partnerships. Consequent to these sustained, concerted efforts poverty decline has maintained pace; indicated inter alia by buoyant uptrend in rural wages. Annual real GDP growth rate is on rising trend, coming close to seven percent in FY 11 and poised to go up further in the coming years. Social development indicators of Bangladesh are in several respects better than in her faster growing neighbors. Stocks of public debt and private sector debt at 37.8 percent and 43.3 percent of FY 11 GDP indicate moderate, sustainable leverage levels in the economy.

At BB we embarked on the process of ingraining the vision of financial inclusion in the financial sector by first issuing guidance for mainstreaming of Corporate Social Responsibility (CSR) obligations in institutional goals and strategies of all banks and financial institutions. With this alignment and orientation of corporate ethos in the financial sector with their social and

* A Presentation in the Global Policy Forum 2011 organized by AFI on 28-30, September, 2011 at Mexico


environmental obligations,banks are now spontaneous and proactive in innovating efficient, cost effective modes of reaching out to the excluded and under-served population segments. We believe that the approach of financial development and inclusive growth adopted in Bangladesh is of broader relevance beyond her borders; and that global success in maintaining broad-based inclusive economic and social growth with commodity price stability and financial stability hinges urgently on similar reorientation of corporate goals and objectives of all banks and financial institutions in all jurisdictions, from sole pursuit of purely private gains to proper alignment with their social and environmental obligations.


PPP for Rapid Economic Growth*

Public-Private Partnership is an issue of key priority for rapid economic growth in Bangladesh. We are all aware of the inadequacies of physical infrastructure constraining the development efforts towards faster, inclusive economic growth and rapid poverty elimination. We are all aware also that Public-Private Partnership is a key mechanism that can hasten progress in addressing these inadequacies effectively. I congratulate DCCI heartily for coming forward to join hands with the government in promoting PPPs, with the launch today of their new Business Initiative Leading Development (BUILD).

I look forward to seeing in the near future implementation of a steady stream of new infrastructure projects in the country. Let me take this opportunity to remind that the growth and poverty reduction aspirations of our economy will require massive investments, not all of which can be accommodated from domestic resources. To avoid balance of payment pressures, a substantial part of the new investments will need to be from foreign sources. Bangladesh maintains a permissive and welcoming policy posture for external investment inflows, from both non-resident Bangladeshis and foreign individuals or institutions. BB has always been supportive of measures to attract foreign investment. I Chair the BOI Committee for approval of foreign term borrowing proposals of investors. Several proposals have lately been approved, with many more in pipeline. BB has recently issued license to MOF's new BIFF (Bangladesh Infrastructure Financing Fund) for financing PPP projects. BB's IPFF is yet another facility extending credit lines to infrastructure projects. I hope and believe that the BUILD initiative of DCCI will keep these in mind and play due role in mobilizing private sector PPP investments from both domestic and outside sources. Further I have for some time now been talking about issuance of a Government Diaspora bond for NRBs and other non-residents, as a source of external funding of infrastructure projects. I hope BIFF will take necessary steps in materializing this proposal as soon as possible.

Before I conclude with congratulations again for DCCI's new initiative, let me remind you that unlike doom sayings voiced recently in some media reports,

*DCCI National Conference on 'PPP for Rapid Economic Growth', 17 October 2011.


there is no major imbalance in our economy that can seriously impair continuing growth from the toils of our working masses and the initiatives of our creative entrepreneurs.

CPI inflation is indeed somewhat beyond comfort zone for some months now, but this is not unique to us, our fast growing near neighbors are also in similar situation. We expect to see CPI inflation in Bangladesh begin easing by early months of 2012; from BB's ongoing proactive liquidity management coupled with moderation of global commodity prices. The current weaknesses in our capital markets are also not exceptional; stock markets across the globe are now jittery from weak growth and imbalances in major advanced economies. At current levels, many stocks traded in our stock exchanges are attractively valued and should therefore be of interest to both local and foreign institutional investors. I believe that DCCI and other business forums can play useful role in helping overcome the present crisis of confidence in our stock markets by proactive efforts of attracting interest of foreign institutional investors to these markets, drawing attention to Bangladesh's record of stable and steadily rising economic growth.


Bangladesh at 40: Changes and Challenges*

Labeled immediately after her birth in 1971 as a hopeless 'basket case' by many like Henry Kissinger, Bangladesh has come a long way today earning recognition as a steadily growing economy with firm footing on the path of inclusive social and economic progress, with global recognition as an upcoming emerging economy. From the initial position as a primary goods producing small agrarian economy Bangladesh has by now transformed into a globally integrated manufacturing economy, a leading apparels and textiles exporter gradually breaking grounds into newer areas like shipbuilding, light engineering, IT enabled services, and so forth. Bangladesh is also an acknowledged global pioneer in micro-finance for self-employment based poverty reduction; spawning micro-finance based large globally active socially responsible businesses like ones (e.g. Aarong handicrafts, dairy, poultry etc.) run by the BRAC.

The social and economic progress attained since the birth of Bangladesh as a new nation will not be immediately obvious from reports and reviews in the country's print and electronic media freely voicing the views of our predominantly young, aspiring population mainly reflecting the gaps between the prevailing social and economic realities and their expectations; only rarely looking back on the path trodden behind. I therefore heartily congratulate the Business Studies Faculty of JU for organizing this three-day Seminar for stock-taking of achievements thus far and for brainstorming on the challenges on the way forward towards socially just and environmentally sustainable prosperity with advancement opportunities open to all in our population. The coverage of topics in the seminar agenda is comprehensive, and I am confident that the discussions in the seminar will provide ideas and thoughts valuable to our development planners and practitioners, policy makers, civil society development activists, academic and applied researchers.

Let me recall here a few macro data sketching the outlines of the picture of progress we attained in forty years. Our nominal GDP in US dollar terms has increased more than eighteen fold against population growth of about two fold. GDP growth trend in real terms has steadily gained pace, from 1.1 percent and

*Seminar on 'Bangladesh at 40: Changes and Challenges', Organized by the Faculty of Business Studies, Jahangirnagar University, 9 December 2011.


3.2 percent average annually in the 1970s and 1980s, rising to 5.8 percent in the first decade of this century. In FY 11 Bangladesh economy grew 6.7 percent in real terms, and the target for FY12 is 7.0 percent. Trade openness has integrated Bangladesh with the global economy; with trade GDP ratio rising from around 20 percent of the 1970s and 1980s to 40.7 percent in FY11. Poverty has come down to about 30 percent of the population now, from around 57 percent in the 1990s. Bangladesh is ahead of most of the South Asian nations in progress in human development indicators. Rising emigration from our youthful population to labor markets abroad have been fetching steadily growing wage remittance inflows; bolstering our external sector viability and per capita GNI, helping progress towards crossing the middle income country group income threshold by 2020. Despite some weaknesses, democratic governance and rule of law safeguarded by independent judiciary is a major achievement in the governance area, attained through decades of struggle and efforts of our broad masses.

With sustained development dynamism powering our growth pace we can reasonably aspire for joining the group of upper middle income countries by 2030 and mature developed economy status by 2050. There are of course formidable challenges to overcome on the path forward, both in the near and longer terms. One looming near term challenge is the apprehended impact of the ongoing debt crisis in the EURO Zone, hurting prospects of our export, wage earners' remittance and investment inflows from the Euro Zone; weakened growth prospects of other countries outside the EURO Zone due to the crisis will also hurt prospects of commodity and manpower exports to those countries. Appropriate coping responses will need to include seeking strengthened trade and investment ties with near neighbors and other fast growing emerging economies, a course already adopted by us. The longer term challenges include the still prevalent extreme poverty of nearly twenty five million of our population, climate change threats, inadequacies in physical infrastructure, widespread use of corrupt practices in public life criminally enriching the powerful at the expense of the weak and the vulnerable. Bangladesh's perspective, five year and annual development plans outline comprehensive, well rounded approaches in addressing these challenges, pursuing inclusive socio-economic growth and well-being for all. Bangladesh Bank's (BB's) financial inclusion drive is proactively supporting the government's growth pursuits while maintaining monetary and financial stability; inter alia ensuring adequate credit flows to productive pursuits including agriculture, SMEs, and environment friendly projects like renewable energy generation. I look forward to these and the other challenges being deliberated at depth in the seminar sessions.


Beyond Inflation Targets*

I deem it a privilege that we are co-hosting at Dhaka with UNDESA and UNESCAP this regional training workshop on inflation targets and policy options for sustaining growth and equitable development, a theme of topical importance for all economies in today's world, large and small, developed and developing. With my warmest welcome for the resource persons and the workshop participants from central banks and finance ministries of countries in our region, I am looking forward to rounds of very lively debate and exchange of ideas and hands on experiences of policy makers and practitioners in the workshop sessions.

In the closing decades of the last century the view that monetary authorities should pursue inflation targets as their sole objectives gained prevalence, inter alia in the multilateral institutions like the IMF and WB. Many developed economies adopted this approach, a number of emerging market economies also went ahead with preparatory steps in that direction.

To many others the overly narrow minimalist view of central bank objectives didn't feel wholly convincing or appealing, however. Drastic monetary tightening or loosening towards attaining specified inflation targets can be sources of destabilizing volatility in output and employment. It was in the heydays of inflation targeting that we saw massive buildup of financial sector instability from overly lax monetary policies in low inflation advanced economies. To cope with the global financial crisis triggered by this instability the monetary and fiscal authorities in developed economies resorted to 'quantitative easing' and other unorthodox measures, beyond inflation targeting. Also, not all central banks in all advanced economies embraced inflation targeting as their sole monetary policy objective, the US Federal Reserves notably among those.

For central banks in developing economies, supporting inclusive growth at the highest sustainable rate is crucially important for equitably opening up advancement opportunities for the disadvantaged population segments. Monetary and credit policies in these countries need to be geared to support

*Inauguration of the UNDESA-BB regional training workshop "Beyond inflation targets: policy options and instruments for sustaining growth and equitable development", 19 December 2011.


broad-based output growth, besides aiming at price stability. While regulating monetary growth carefully to prevent buildup of demand pressures from excessive monetary accommodation, policy steps are needed also to engage credit markets in better meeting the financing needs of all productive undertakings, including those of the typically under-served micro and small scale farm and non-farm enterprises. To leave room for increasing credit flows to these enterprises the Governments need to limit buildup of public sector borrowing pressure on the credit markets. This entails proper co-ordination and dovetailing of monetary and fiscal policies, and in Bangladesh the government and the Bangladesh Bank (BB) are in continuous contact and consultations to this end.

The BB has launched a comprehensive financial inclusion drive towards better engaging credit markets in channeling adequate financing flows to the undeserved economic segments including micro and small scale enterprises. Directed lending from a largely state-owned banking system used for this purpose in the past has now become largely ineffectual, with dwindling market share of state-owned banks. BB has in this context adopted the new approach of guiding all banks into mainstreaming of Corporate Social Responsibility (CSR) in their corporate goals, objectives and ethos; motivating them into spontaneous engagement in financial inclusion initiatives. Experience with this approach thus far has been encouraging, banks are enthusiastically developing and launching various innovative ways of reaching out with financial services to these population groups, like mobile phone and smart-card based banking, opening of no-frills bank accounts for the poor with nominal deposits (more than nine million new accounts already opened). With the new CSR driven commitment to socially and environmentally responsible lending, banks have also gone ahead into financing environment friendly projects like solar and bio-fuel based energy generation, effluent treatment and so forth. BB is supporting and facilitating the financial inclusion initiatives of banks in diverse ways, providing interalia a secure and efficient fully automated interbank payment and settlement platform, a regulatory framework for mobile phone/smart-card based banking, an online credit information bureau, refinance lines for banks against their SME loans, and so forth. A well orchestrated financial literacy program soon to be launched will help widen and deepen financial inclusion among the unbanked population segments. A Consumer Interest Protection Centre (CIPC) has been activated with a dedicated hotline (16236) and other electronic communication channels for addressing consumer grievances and monitoring actual benefits from the various initiatives. These steps are contributing in a big way to confidence building on the financial sector as humane and socially responsible.

While at first sight these might appear rather peripheral to core central banking concern about price stability; output enhancement supported by these initiatives clearly contribute to price stability by providing supply response to growing demand. With banks sensitized towards socially responsible lending, BB's monetary policy stance, announced ex-ante in half yearly Monetary Policy Statements (MPSs), now maintain a conscious directional bias favoring lending for productive pursuits and discouraging lending for wasteful, unproductive and speculative activities.


Besides indoor discussion and debate on the in issues the workshop sessions, the participants will also be taken on a day long field visit to a couple of ongoing financial inclusion initiatives. I hope the on-site visit will give participants a hands-on feel of how these initiatives seemingly at far periphery of central banking concerns actually help sustain price stability by augmenting output response to growing demand pressures, the core concern for central banks.


An Alternative Financial System for Inclusive Growth and Sustainable Development*

The theme of the conference 'Alternative Financial System for Inclusive Growth and Sustainable Development' is important considering the economic slowdown that many countries around the world are experiencing in recent years. The world economy only just coming out of a downturn triggered by the global financial crisis is showing indications of slipping yet again into another slowdown, this time precipitated by the simmering European debt crisis.

Every country aspires for high economic growth; however, a major concern to the policymakers is whether the economic and social growth that a nation achieves over time is sustainable. Sustainable development meets the need of present generation without compromising the ability of future generation to meet their own needs. Empirical evidence suggests that the growth process is sustainable when it is inclusive, that is, the fruits of the economic and social growth are enjoyed by all population segments of a society and they have equal opportunities to participate in the growth process.

In Bangladesh, the present government in its perspective plan for 2010-2012 seeks to achieve an economic growth which is not only high but also inclusive. By inclusiveness, we understand a growth strategy that embraces all population of Bangladesh rather than big chunk of money in the hands of a number of elites which is the case in many developed economies. Realizing government's agenda to achieve inclusive and sustainable growth, Bangladesh Bank (BB), as the central bank of the country, has been promoting financial inclusion by undertaking a number of initiatives to bring the unserved and under-served within the umbrella of financial system. These initiatives include sharecropper financing scheme, Ten Taka accounts for farmers, students, and freedom fighters, online and mobile banking, directing banks to open bank branches in rural areas, green banking, banking automation, and so forth. Apart from its core responsibility of formulating and implementing monetary policy to achieve price stability, BB is playing a developmental role as well which is necessary and within its goal and objectives of promoting inclusive economic growth. Some may ask why financial inclusion and how does it promote inclusive growth?

*Conference on 'An Alternative Financial System for Inclusive Growth and Sustainable Development', organized by The Institute of Chartered Accountants of Bangladesh, 6 February 2012.


Financial inclusion is a key element of social inclusion necessary in fostering inclusive growth participated by and benefiting all population segments. Financial inclusion combats poverty by opening up blocked advancement opportunities for the disadvantaged poor; unleashing their creative energies for lifting themselves out of poverty in terms of both income and other measures of human development like health and education. The government and Bangladesh Bank have intensified efforts to bring excluded population segments and economic sectors into financial inclusion with new support programs like refinance against loans to sharecroppers (besides mandatory involvement of banks in agricultural financing), micro and small enterprises, renewable energy and effluent treatment projects; encouraging creative partnerships between banks, MFIs, mobile phone and smart-card technology platforms innovating cost effective financial service packages for various client segments.

At present, around 87.0 percent of adult population of Bangladesh has access to formal financial services which was around 78.0 percents three years back. This has been possible due to some milestone programs initiated by Bangladesh Bank in recent years. Let me shed lights on some of these initiatives.

Sharecroppers had long been excluded from the formal financial system because of lack of collateral and the fact that they are treated too small by banks and too large by MFIs for institutional credit. As a result, they had long been left behind as the 'missing middle' and excluded from formal financial services. BB's refinance line for Sharecroppers of Taka 5.00 billion being implemented through BRAC offered institutional credit to this excluded but productive group of farmers for the first time in the history of Bangladesh. Till November 2011, Bangladesh Bank has provided BRAC with refinance facility of Taka 3.1 billion with which BRAC has provided loans to 270,802 sharecroppers in 160 upazilas of 37 districts. Another exemplary initiative of Bangladesh Bank towards fostering financial inclusion is bank accounts for farmers with initial deposits of only Taka 10. More than 9.0 million accounts have already been opened under this scheme and are being used for government transfers such as diesel subsidy. Mobile banking offers potential ways of reaching out the excluded population segments particularly in rural areas. Bangladesh Bank has issued guidelines for mobile financial services and many banks have already started their operations in partnership with telecom companies. For promotion of socially responsible business practices, BB has been guiding banks and financial institutions in embracing corporate social responsibilities into their goals and objectives. Besides, BB has been promoting green banking by exercising in-house environment friendly practices as well as encouraging banks to follow similar practices. Installation of automated clearing house, commencement of online CIB, e-recruitment and e-tendering are the examples of BB's drives towards automation of banking services.

Thus you can see how BB has been promoting an alternative financial system to help the government achieving inclusive growth and sustainable development. However, it is also true that banks and the supervision authorities will need to keep eye on proper risk management in the newer areas of lending expansion while promoting financial inclusion with appropriately designed initiatives, so as to protect financial stability by preserving the desired standards of asset quality. Transparency and fairness in pricing of financial services for micro and small


enterprises are also important issues from consumer rights protection viewpoints. With that goal in mind, BB has launched a Consumer Interests Protection Centre (CIPC) with a dedicated hotline 16236 to address the grievances of consumers engaged in the financial sector. This centre is working like a 'banking ombudsman' and providing necessary relief to the aggrieved customers along with many advises on new policies and financial products.

I note with keen interest that your Institute has made considerable achievements since its inception. I am pleased to observe that ICAB has been working with its utmost endeavors for the overall development of the accountancy profession in the country. The Institute has been playing a key role in improving quality, transparency, and accountability in the financial sector, both in public and private sectors. Mr. President, I assure you that Bangladesh Bank will always stand beside the institute and will provide all possible co-operations for overall development of the accountancy profession in the country. You know that a co-ordination committee is working with you and I hope some important issues like fees, appointment and independence of auditors will be resolved by this committee.


Current Economic Situation of Bangladesh*

Bangladesh grew by 6¾ percent in FY 11 and on average by 6 percent a year during the past decade. Over the same period, external trade increased by almost four-fold in U.S. dollar terms and more than doubled as a share of GDP. At the same time, the poverty level nearly halved, in line with achieving most of our Millennium Development Goals by 2015. These achievements are stunning given where this country was at its birth. Bangladesh's Vision 2021 aims to raise growth to an average of 8 percent a year over during this decade and make further decisive inroads in reducing poverty, in line with our aspiration to achieve middle-income status in the next 10 years.

In order to get to this 8 percent growth we need to cash in on our demographic dividend. Our ratio of working age population to the total population is steadily rising due to the impressive progress we have made in fertility reduction. This means our dependency ratio is falling and there are more people who can contribute productively to growth and society at large. However as the example of Sri Lanka, and many other countries outside the region, clearly illustrates this demographic dividend does not last forever. At some point this bulge in the working age population will transform itself into a bulge in the elderly population. As such in the next ten years or so we have to make the most of this low dependency ratio to invest in our countries future by making sure that we do not carry on as business as usual. We must use this next ten years to create higher productivity jobs, intermediate the savings that this working population has to invest in our country's infrastructure and institutions and build the foundations to prepare for when this demographic dividend is over. The next ten years is the best opportunity we have to drastically cut poverty in Bangladesh. So how can this happen?

First of all, in order to create jobs we need to maintain macro-stability. Compared to its peers Bangladesh's growth performance has been remarkably stable as has its macro-stability. This year we have seen some macro pressures but we are managing them.

*Luncheon Meeting on 'Current Economic Situation of Bangladesh' organized by FICCI, 28 March 2012.


Take the example of the exchange rate. In order to reduce the number one constraint to investment, the government decided to invest in power plants that would quickly address the power shortage but which required higher oil imports. At the same time oil prices remained firm and this year rose to record highs. As a result of these balance of payment pressures, the taka began a natural and expected depreciation, also prompted by the depreciation of the Indian rupee. At that point some commentators speculated about a "free-fall" of the taka. Yet back in early December my senior management team and I took the tough decision that we will do what it takes to avoid a so-called 'free-fall', even if it means a temporary squeeze on the economy. We spent many days debating the policy trade-offs but decided that we need to sharply tighten domestic money markets and import demand. Many were skeptical when on January 26th we launched the new Monetary Policy Statement and said that soon we would achieve an exchange rate equilibrium. Yet you have seen the results with the exchange rate turning the corner in early February, and after the exchange rate stabilized, bank liquidity conditions also improved with the call money rate falling from around 20% in January to around 13% now. In parallel we have limited foreign reserve depletion and our gross foreign reserve is around the benchmark three months of import cover. But even in the weeks when reserves were declining we had back-up plans about lines of financing from various commercial sources. Looking ahead on our balance of payments pressures we know that power, transportation and climate change-mitigating infrastructure needs remain immense, as noted in our Sixth Five-Year Plan (FY 11-15), including associated import requirements, which are likely to add to our transitional BOP financing needs. As such we have opted for a three year IMF Extended Credit Facility (ECF) which is going to the IMF Board next month for approval. This ECF is also a signal to foreign and local investors of our commitment to maintain macro-economic stability and undertake the necessary reforms for sustained growth.

The point I want to make with these examples is that we often take decisions which are market sensitive and so we operate quietly. But be assured, there are a set of competent and dedicated professionals who work in the key economic institutions in this country who have maintained this track record of macro stability even in the face of many exogenous shocks.

Let me turn to our monetary policy stance. While country specific circumstances remain critical in determining the appropriate pace and mix of policy adjustments, cross-country experiences from around the region illustrate the importance in Bangladesh of using monetary policy to stay ahead of the curve and act preemptively to mitigate risks from domestic and external imbalances. In FY 10 and FY 11 the global economy was reeling from the global financial crisis of 2009 and in order to avert an impact on the Bangladesh economy, broad money growth and specifically private sector credit growth were eased. The Bangladesh economy as a consequence of this stance, and other pro-active measures, emerged largely unscathed from the global crisis, averaging over 6% growth between FY 2009 and FY 2011. In FY 12 the economy faces different challenges related to both global and domestic factors and as such our monetary stance has been adjusted accordingly while keeping the key goals of the Bangladesh Bank-inflation management and supporting equitable growth in mind.


This brings me to what I consider my biggest challenge. While we have restored exchange rate stability and improved liquidity conditions in the money markets, the one indicator which remains stubbornly high is inflation. Point to point inflation in February 2012 is at 10.4% and average inflation is close to 11%. We know that both for optimal economic growth and to ensure that the poor are not disproportionately affected, single digit inflation is ideal. As a result our last Monetary Policy Statement emphasizes the restoration of single digit inflation. There has been some progress towards this goal with point to point inflation declining from a peak of 12% in September to the current 10.4%. However, let us also be clear that Bangladesh Bank does not have all the tools in its hands to achieve this target. Inflation is determined by numerous factors such as global commodity prices, administrative price adjustments for subsidized goods such as fuel and domestic supply-chain bottlenecks which are outside our control. However there is a clear link between the growth of money supply and inflation which is why we have adopted a restrained stance.

But this link also involves a time-lag. In India, policy rates were raised 13 times, by a total of 375 basis points, between March 2010 and October 2011 to address rising inflationary pressures. As a result the main inflation guage, the Wholesale Price Index, has now fallen from 10.5% in mid-2010 to a two year low of 7.5% in December 2011. In Bangladesh monetary tightening began six months after India and as such we expect to reach single digit inflation by the end of this fiscal year.

Our monetary growth targets for FY 12 are on track establishing the credibility of the stance taken in the Monetary Policy Statement. Our latest numbers show that broad money growth (M2) of 17.9% is well on course to get to the 17% June target we set in our last MPS. To help achieve our program targets, BB is prepared to maintain the existing restrained monetary policy and to ensure banks better manage liquidity pressures.

The central bank will also encourage all commercial banks to maintain market-determined lending and deposit rates to facilitate monetary transmission and properly price risk. At the same time we have instructed banks to keep a check on spreads so that excess profits are not made on the backs of private sector entrepreneurs. Specifically we are monitoring that banks keep spreads below 5% except for SME and consumer lending. And in order to facilitate access to finance to worthy businesses, I as Chair of the relevant Board of Investment Committee have allowed $598 million of foreign borrowing since the start of this fiscal year by local corporate in sectors as diverse as shipping, power, footwear, IT, telecom, agriculture, steel and RMG.

Let me turn to the issue of short and medium term growth prospects. The fiscal stance is supportive of the government's growth strategy but the rapid growth of borrowing from the banking sector-currently around 16500 crore taka - has given rise to concerns over excessive crowding out of credit to the private sector. We must remember though that Government borrowing is still only around one-fifth of total domestic credit in the economy. As a result of this limited share, there is only a very limited amount of crowding out that this level of government borrowing can lead to. As such even with these projected higher levels of government borrowing in our monetary program we are confident that


at least 16% private sector credit growth can be maintained while ensuring that our overall monetary targets are not breached.

Domestic growth was projected at 7% in the FY 12 Budget assuming stable domestic and global economic conditions. Data for the first half of FY 12 on agricultural output as well as indicators of industrial and service sector performance-specifically the Quantum Index of Manufacturing Output and export data-suggest an overall robust growth outlook and would support the FY 12 projection. However, global growth prospects remain highly uncertain in key trading partner countries, particularly in Europe. The United States is showing fledgling signs of recovery but overall the growth prospect for 2012 in advanced economies remains bleak and there have also been downward growth projection adjustments in developing countries including India and China. The combination of the global slowdown with slowing imports and moderating credit growth will all limit aggregate demand. As such we are projecting growth in the range of 6.5-7.0%.

However, what is more important than short term fluctuations is for us to understand the key link between investment and growth and specifically grapple with what factors impede firms from investing more in Bangladesh. A slew of surveys over the past ten years point to the same issues. Firms report electricity, corruption, political instability, access to land and tax administration as key impediments.

For many of these there has been clear progress especially due to greater recent investments in power generation and in e-governance. Of course there is still a large unfinished agenda. However for the access to land issue we have to accept that our limited geographical land-mass and growing population will make this constraint even more serious in the future. As such new industries will have to take this account and we need to finance and nurture those which require less land-use - and service sector industries come to mind. But what type of job-creating growth do we want to see and how can all actors, be it government, private sector and foreign partners support this vision? My own view is that so far relatively low wages have given Bangladesh a competitive edge in garments but that this low cost advantage may not be enough to compete globally in the medium run. As such we need to strategically build the skills required to move up-market both in garments as well as in other industries such as shipbuilding, pharmaceuticals, jute, leather products and so on. But more fundamentally we need to recognize that the services sector now contribute about 50% of GDP. So how can we move to higher productivity service sector based job creation? Just like garments we will need to start somewhere and then build up. For instance, we can gradually increase our share of the e-services market. It may start 'low-end', as say the data entry business shifts from India, but eventually we want to become more 'high-end', producing world-class software etc. There are a number of Business Process Outsourcing firms which have come to us recently and we welcome them as this could be a key source of employment for the larger numbers of educated youths coming out of our educational system. Moving beyond product diversification the other issue related to export-led growth is the issue of geographical diversification. It is good that RMG exports to eleven new countries have risen by 42% over the past seven months. But these eleven


countries are still well below 10% of total export volume. In order to promote diversification I think we need to have performance-related pay for our trade promotion staff in overseas embassies. This will promote the necessary incentives to find new markets.

In general, we need to debate different views but what we need is a forum for these discussions so that the Government and private sector can regularly get together and discuss both their immediate issues as well as a medium term vision of stimulating investment and job creation.

Let me conclude with some suggestions for those of you here today. FICCI is a body representing foreign investors and we have to be candid that the levels of foreign investment in Bangladesh are way short of what they should be. And yet it isn't that there isn't adequate foreign interest in exploring possibilities. Flights to Dhaka are always fully booked and so are hotel rooms. But this investor interest is not translating into the billions of dollars of FDI which we need to move beyond our current growth path. There are many factors here, some which we have discussed above and are resolvable by stroke of the pen decisions and others which will need more time such as resolving power and gas constraints. But there is also a role for those of you sitting in this room. Some of you represent foreign missions and to you I encourage you to move out your Gulshan-Baridhara corridor and truly immerse yourselves into our country. Find out who the reform champions are in government, build a rapport with them. Discover the many entrepreneurs of this country who are overcoming all kinds of hurdles. Go out of Dhaka regularly and see what potential this country has. Because if you do all this you will be able to persuade those investors who are undecided, who are dithering about whether to bring in their capital, that it is worth it despite the admittedly many obstacles they might face. At the end of the day the World Bank Doing Business Indicators show that we are ahead of India, Indonesia and the Philippines and what we need from you is to portray Bangladesh in that manner. I know there are many of you here who are not from foreign missions and are fellow Bangladeshis. To you as well let me encourage you to help in improving our country's image by showcasing how far we have come in such a short period and helping foreign investors navigate their way through to a successful job-creating investment. And from my part, as Central Bank Governor, and in my role at BOI, I remain committed to helping create that conducive macro environment which all investors require.


Fifty Years of Banking in Bangladesh-Vision 2021*

I am much heartened to see the banking community of Bangladesh converging in this Summit to sketch out their medium and longer term strategic vision for the financial sector in Bangladesh, from which to chalk out progress paths towards excellence in meeting the financial services needs of our economy growing with increasing vigor towards middle income country status and beyond. Such strategic planning exercises setting forward-looking vision and mission is important for every bank in taking optimal advantage of emerging opportunities while also sailing safely through uncertainties and market turbulences coming with economic upswings and downswings. Though already in regular practice at Bangladesh Bank (BB) for some years now, strategic planning exercises are still sparse and sporadic in our banking sector. I congratulate FinExcel and the participating banks for this laudable initiative to inculcate forward looking strategic vision in our banking community, and I shall deem this bankers' summit a resounding success if it results in strategic planning taking root at all the participating banks by the end of this calendar year.

The banking sector in Bangladesh has grown several-fold since independence in 1971, in tandem with the uninterrupted spell of steady, stable growth of the country's economy. Just one indicator may be sufficient to demonstrate the spectacular magnitude of banking business growth. Credit and investment assets of scheduled banks amounted in December 1972 to a minuscule Taka 7.07 billion; this stood 654 fold higher at Taka 4625.85 billion as of December 2011. Beginning as almost wholly state-owned sector making directed loans at prescribed interest rates, our banking sector has undergone successive rounds of major structural and regulatory reforms; transforming it to a vibrant private sector led market based banking system, largely shaking off the legacy of repayment default culture from the years of directed lending regime. BB has steered this transformation by continually promoting market development in a broadly stable monetary and inflation environment. Besides introducing enabling policy reforms, BB has provided secure and reliable IT based platforms for credit information, and for automated clearing & settlement of inter-bank paper based & electronic

*Bankers Summit on 'Fifty Years of Banking in Bangladesh-Vision 2021' organised by Financial Excellence Limited, 13 April, 2012.


- Though IIFM is a money market like call money market, it is fully based on Islami Shariah.

- The modes of operation of this market have been designed in such a way that it does not replicate any form of interests at any stages of the transactions which is prohibited by the Islami Shariah.

- It will be conducted on the basis of Mudaraba.

- BB will act as a custodian of IIFM and no fees/charges will be imposed for this.

- Islami Shariah based banks & financial institutions and islami banking branches of the conventional banks can transfer their investible surplus fund into Islamic Bond fund on a daily basis.

- According to Profit Sharing Ratio (PSR) determined by the Islami Bond Fund, the fund will be provided to the recipients (Islami Shariah based banks & financial institutions and Islami banking branches of the traditional banks) subject to availability of fund.

- It will be determined as per the provisional rate of profit on various term deposits declared by the fund recipient. To determine the rate of profit from time to time, the decision of Islami Bond Fund will be the final. If the fund recipient has no term deposits as determined by the Islami Bond Fund, the rate of provisional profit will be the rate for the next term deposits.

- At the maturity, the fund recipient has to be paid capital including profit in accordance with the PSR. At the year-end (January-December), profit paid at the repaid provisional rate will be adjusted with the announced final profit rate by the fund recipient.

It is a remarkable day for the banking industry of Bangladesh because formal transactions are going to be started in Islami Interbank Fund market. I am thanking to all concerned officers of BB and participating banks. I am also appreciating Islami Bank Bangladesh Limited to be the pioneer in placing one hundred crore Taka in IIFM spontaneously and declaring the inauguration of the transactions of IIFM.


payments and transfers. BB is also steadily bringing prudential parameters for banks like capital, liquidity, risk management and disclosure requirements into ever closer convergence with international best practice standards; to facilitate integration of our banking sector with the global financial system so that it can affordably access investment resources from pools of global savings. Stress tests with data from recent financial statements of banks in Bangladesh indicate generally satisfactory resilience against occasional jolts of moderate shocks.

Against these substantial strides on progress path, the unfinished agenda on the yet-to-do list is also pretty long, with challenges demanding wholehearted commitment and engagement in sustained corrective efforts. Nearly half of our population still remains deprived of banking services, and poverty still afflicts nearly a third of the country's population. Lending resources of banks continue being channeled largely to well-off borrowers, often with insufficient diversification and inappropriate asset-liability maturity mismatches. Corporate governance weaknesses linger in many banks, allowing dominant equity holders to manipulate credit access, credit appraisal and internal control processes to their own advantage. Absence of clear articulation of strategic goals and objectives lead to management weakness in important respects. Firstly, boards and senior managements fixated mainly on quick short term gains tend to get tempted towards speculative playing up of market volatility, heightening destabilization risks harmful for longer term institutional soundness and viability. Absence of forward looking strategic vision breeds mindsets of acquiescence of lack of completeness and transparency of disclosures in financial statements of borrowers, leading to weak credit appraisal and risk assessment. Further, a bank lacking in longer term strategic vision and focused only on immediate gains deprives itself of future earning opportunities from cultivating new customer bases in large population segments of small means (the so called 'bottom of the pyramid'), besides failing to fulfill an important corporate social responsibility obligation of combating inequity and poverty in the society they profit from.

The first step in overcoming these deficiencies and weaknesses and gearing up for attaining excellence in banking will be of properly orienting the institutional goals and objectives, shifting focus away from quick high gains from potentially destabilizing speculative activities towards prospects of stable longer term earning income streams from financing productive and socially responsible economic activities, including those of micro and small enterprises of the poor. BB's guidance circulars on Corporate Social Responsibility and financial inclusion drives are intended to steer our banking sector out of this weakness. Periodic strategic planning exercises are excellent tools for such realignment of corporate goals, objectives and ethos towards pursuit of excellence in socially responsible banking supporting the country's aspirations of inclusive economic and social growth. Both owners (directors in bank board) and the senior management would need to engage intensively in the strategy setting exercises.

Pursuit of excellence in corporate governance will follow next after strategic resetting of corporate goals and objectives; requiring adherence to proper credit appraisal, risk management and internal control processes in letter and spirit, free of vested interest influences of dominant director groups or colluding senior management functionaries. We at BB will much love to see banks adopting and


adhering to higher risk management, corporate governance and risk management standards than the minimum regulatory requirement. Not infrequently are the standards are put in place as process rituals in form rather than in true spirit; this should change following proper resetting of corporate goals and objectives through periodic strategy setting exercises.

IT infrastructure and other physical facilities necessary for banking services of excellent standards come next after goal setting and corporate governance. Reaching out cost effectively to diverse customer segments throughout the country with banking service packages suiting their diverse and evolving needs require secure and efficient IT platforms with online connectivity to domestic and external interbank payment and settlement networks. The complexities of credit appraisal, risk management, liquidity, capital and provisioning requirements of modern day banking have also rendered such IT platforms essential. As I mentioned in the beginning, BB is active in spearheading initiatives of putting in place and upgrading countrywide connectivity backbone for the inter-bank settlements infrastructure; individual banks will need to be correspondingly proactive in installing and upgrading their own IT platforms in line with rapidly growing and evolving needs. With the progress already achieved in online inter-bank settlements and in mobile telephony, banks can and should now move fast in expanding mobile phone/smart-card based banking services reaching out to new depositor and borrower customers in rural and itinerant urban populations. BB has been actively supporting and encouraging innovative initiatives of banks in this area; and would continue to do so for new initiatives in other areas to bring in new dimensions and new service products in our financial markets. Areas with potentials for innovative developments include issuing and market making in mortgage-backed and other asset-backed debt securities, trade in receivables (factoring and forfeiting), hedging products against market risks and so forth. BB tries to maintain generally congenial monetary and credit policy environment for market development. But not all market conditions are congenial for all kinds of new service products, innovativeness and ingenuity lies in identifying and seizing new opportunities emerging in changing market environment.

I have already mentioned that we are looking forward to steadily increasing openness and integration of our financial markets with the global financial system, for widening cost effective access to investment resources from the global savings pool. Strategic plans of banks will need to have corresponding objectives and action agenda for strengthening external contacts and correspondent relationships. Correspondent banks in advanced markets abroad are often useful sources of know-how about new service and risk management approaches. Hastening adoption of international best practice standards in corporate governance, risk management, internal controls and financial disclosures will facilitate strengthening of correspondent relationships with reputable banks abroad. Increasing external openness will bring in heightened exposure to volatility in global financial markets; risk management capacities in banks will therefore need to be upgraded and bolstered continually. Banks will need to carry out stress testing exercises regularly to identify and address emerging institutional vulnerabilities against shocks of both internal and external origin.


Excellence in banking services will require quick attention to and remedy of customer grievances. As you all know, BB has of late accorded high priority to consumer interest protection concerns in banking services. Banks will need to accord the same high priority to this in their own strategic plans, putting in place processes and access channels like help desks; and above all, sensitizing bank personnel to respond properly and swiftly to customer grievance concerns.

While I have enumerated in the foregoing some of what I see as major issues and concerns on path to attaining excellence in banking services in Bangladesh by year 2012 and beyond, there may of course be other issues that your deliberations in the upcoming sessions will bring up. Personally and on behalf of BB I heartily welcome the beginning of your journey towards excellence with collective brainstorming in this summit, and will always be ready to extend supporting and guiding hand. Let me conclude here, looking forward to fruitful outcome in charting your progress path ahead. Thank you all for your patient attention.


Islami Interbank Fund Market*

You all know that until now, we have given approval to seven Islamic banks and some branches of 16 conventional for doing Islamic banking since license given to Islami Bank Bangladesh Ltd. in 1983 for the first time. In the face of recent world economic situation weakening position of the conventional banking system has brought the opportunity for the entire world to think over the issue of Islamic banking in a different angle. At present, apart from Muslim countries, Govts. of the many other countries of the world collect money from the market through using Islamic banking products i.e., SUKUK.

Islami banking system has been expanded in Bangladesh. Now 18.42% (Taka 867.07 billion) of the total deposit and 21.21% (Taka 813.87 billion) of the total asset (credit&advance) in the banking sector belong to Islami banking system. With the expansion of the Islami banking, excess liquidity and reserve of the Islami banks have gradually been decreased. Consequently, some Islami banks face liquidity pressure. Almost 37.81% (Taka 24.79 billion) of the net interbank deposit of the banking sector remains in the Islami banks and these banks have also invested about Taka 30 billion in the Islami Bond Fund.

There is no denying the fact that with the expansion of islami banking business, the necessity of creating opportunity for interbank money market among the islami banks has arisen to systematize and consolidate their liquidity management. Bangladesh Bank has undertaken two significant initiatives in 2011 with a view to organizing short-term liquidity management of Islami banks. One of them is making draft proposal to amend the Bangladesh Govt. Islami Investment Bond (Islami Bond) Regulation-2004 and the other one is establishment of Islami Interbank Fund Market (IIFM). Amendment of Bangladesh Govt. Islami Investment Bond (Islami Bond) Regulation-2004 is under consideration of the Ministry of Finance (MoF). We hope this amendment process will be completed very soon.

Islami Interbank Fund Market (IIFM) has been established in the light of Call Money market of the conventional banks to remove the temporary and short term liquidity problem of the Islami Banks. The characteristics of IIFM are:

*Inauguration of Formal Transaction of Islami Interbank Fund Market (IIFM), 3 June 2012.


Promoting Pro-poor Growth: Success of the Present Government*

A nation requires a vision for its cherished development. The election manifesto of the present government 'Vision-2021' has been prepared with the dream of making a new Bangladesh at the outset of golden jubilee celebration of our great independence. A promise of fundamental transformation in all spheres including socio-economical and political arena has been reflected in this vision that also covers the Millennium Development Goals (MDGs).

The present government has placed poverty alleviation and elimination of all sorts of inequity at the forefront of its development strategy. Strengthening of social safety nets, food autarky, faster agricultural growth, employment generation etc. are identified as some of the key challenges for attaining the goals. This article focused on the initiatives taken by the present government during last three years for improvement of mass people especially on poverty alleviation, social safety nets, food security and agricultural sector.

Poverty Alleviation

Poverty eradication, the first condition for development, is the main challenge of the present government. Adam Smith in his book 'Wealth of Nations' noted, 'No society can surely be flourishing and happy of which by far the greater part of the numbers are poor and miserable'. So, undertaking of long term effective programs is required. The government has taken a strategy for combating poverty reduction both in short and long terms. In the poverty reduction strategy framework of the revised National Strategy for Accelerated Poverty Reduction II (NSAPR II), special importance has been given on creation of macroeconomic environment, identification of critical areas and essential infrastructure for pro-poor growth and social protection for the vulnerable section of the society and human resources development. During the last three years, the government had succeeded in groundbreaking for attaining the desired growth. In spite of internal and external obstacles, real GDP growth rate was 6.7 percent in FY 2010-11 which is the highest in last 40 years due to the higher growth in agriculture, manufacturing and service sector and the target for FY 2011-12 is 7.0 percent. In FY 2009-11, per capita income increased by 24

*Article commemorating the 3rd year of the present Government, 6 June 2012.


percent compared to 19 percent in the period FY 2002-04. Due to macroeconomic stability, domestic savings rate increased to 19.93 percent during the last three years against 18.77 percent in FY 2002-04. Export growth has increased to 47 percent during the last three years of the present government.

On the other hand, export growth rate was 27 percent in FY 2002-04. The rate of inward remittance was three times higher during the last three years of the present government compared to that of FY 2002-04. According to the primary report of 'Household Income and Expenditure Survey-2010', population living below the poverty line decreased to 31.5 percent in 2010 from 40.4 percent in 2005. During this period, poverty gap reduced significantly while income inequality ratio decreased moderately. The government has been increasing its revenue budget to eradicate poverty. Bangladesh has achieved significant progress in poverty reduction and targets of the MDGs. Achievement of the United Nations Award on reduction of child mortality rate is undoubtedly recognition of the success of the present government. Bangladesh is also in the right track for attaining other MDG targets including eradication of extreme poverty and hunger, achieving universal primary education, women empowerment etc. Higher growth is not the only way for achieving economic development rather growth has to be poor friendly and sustainable. In recent time, Bangladesh Bank along with the government is working relentlessly on this issue so that the benefit of the growth should reach the majority of the lower tier of the population pyramid. The most important steps are to make the financial services accessible to the underprivileged people including extreme poor, landless, small farmers, sharecroppers, small entrepreneurs and poor women. Central Bank has taken widespread initiatives for protecting customers' interest along with the opportunity of opening bank account by depositing Taka 10 only for farmers and poor.

Social Safety Nets

Since the government believes in long term development vision, it considers social safety net programs not only as a tool of poverty reduction but also as a crisis-fighting-instrument. Microfinance is one of the important determinants for empowering poor population so that they can survive facing poverty. Growth of employment and income generating agricultural and SME sectors is speeding up the poverty eradication process and playing an important role in achieving extensive sustainable economic and social upliftment. The government is trying to empower the extreme poor by providing special grants and supports in the area of education, health, service and training to generate self-employment through microcredit facilities and to ensure food security for hardcore poor by providing food free of cost or at fair price. During the last three years, the areas of social safety net programs and allocation for it have increased.

Social safety net programs include Old Age Allowance, Widow, Divorced and Distressed Women Allowance Scheme, Allowances for the Insolvent Disabled Programme, Education Scholarship for disabled students, increase in honorarium of insolvent freedom fighter etc. 'One House One Farm' is a notable successful initiative of the government in reducing poverty. This project has been implemented in 9,640 villages of 482 upazillas. Measures have been taken to expand the existing project in the current fiscal year. Government's housing loan


scheme (Grihayan Tahbil), Returning Home Programme, microcredit for the self-employment of the women, and the rehabilitation and alternative employment programme for the beggars have been implemented with a view to eradicating poverty. Commercial banks also have been participating significantly in the Corporate Social Responsibility (CSR) activities responding to the direction of Bangladesh Bank. Banks spent Taka 550 million and Taka 3.91 billion respectively in 2009 and 2010 in the CSR activities including education, health, nutrition, sports, disaster management, increase of peoples' awareness in combating environmental calamity and support to the freedom fighter families.

Development of Agriculture Sector

Agriculture is the first and foremost step for the development of an agriculture-based country like ours. Agriculture is the prime among the priority sectors of the government. The aim of the government is to achieve self-sufficiency in food by 2013. A number of steps have been initiated for the expansion of small irrigation facilities, removal of water logging, production of improved quality and high yielding varieties of seeds and their distribution and development and expansion of the varieties of crops suitable for the weather and environment of a particular region. The highest priority has been attached to increasing the production of domestic food grains. The supply of agriculture inputs at a reasonable price is being continued with providing of subsidies. The prices of fertilizers have been reduced thrice to keep them within the grip of purchasing power of the farmers. Taka 48.92 billion was granted as agriculture subsidy in FY 2009-10 and the allocation for agriculture subsidy was Taka 57.0 billion and Taka 45.0 billion in FY 2010-11 and 2011-12 respectively. The successful decoding of genome sequencing of jute has unfolded a new vista for further invention of new high yielding species of jute, which are expected to be salinity-resistant and tolerant to drought, insects and diseases. Agriculture credit is an important input for the development of agriculture sector.

Along with extensive credit facilities in the agriculture sector, Bangladesh Bank has brought qualitative changes in the process of credit flow specially by strengthening monitoring activities so that the farmers can avail hassle-free credit in time in a transparent way. Disbursement of agriculture credit in FY 2009-10, 2010-11 and 2011-12 (up to September 2011) was Taka 115.12 billion, Taka 121.84 billion and Taka 20.52 billion respectively.

The target for the current financial year is Taka 138.0 billion, which is the highest so far. A refinance scheme of Taka 5.0 billion has been launched to ensure the credit facilities for the landless sharecroppers who were otherwise deprived of institutional credit. Under this scheme, about Taka 3.1 billion was disbursed among 2,70,802 sharecroppers till date. To make the agriculture inputs available and agriculture credit disbursement easy among the farmers, 18.2 million agro-input assistance cards have been distributed across the country and savings accounts of more than 9.5 million farmers have been opened accepting Taka 10 only as an initial deposit. Steps have been taken to disburse credit at 4 percent concessional rate to encourage cultivation of different variety of pulses, oil seeds, spices especially ginger, turmeric, onion, chilly, cumin and maize. As a result, expenditure for importing food grains is gradually decreasing.


Food Security

Another priority sector of the government is to ensure food security. Enormous success has been achieved in this sector. The government has updated the 'Food Security Policy' with a view to ensuring food security for the hardcore poor and prepared 'Bangladesh Food Security Investment Plan 2010' in order to develop a sustainable food security system. The three elements which are very important to ensure food security in the country are adequate supply of food, increasing the purchasing power of people for getting food and ensuring nutrition for all. There has been a record growth in food production due to favorable environment, extensive agriculture credit disbursement, agricultural equipments and other timely assistances of the government. During the last three years, annual food production has increased by 9.71 percent. The increase of wages and access of people to income-oriented activities have enhanced their purchasing power. In order to meet the food demand of the hardcore poor, the coverage of the Vulnerable Group Feeding (VGF), Vulnerable Group Development (VGD), and Gratuitous Relief (GR) programmes have been widened. Steps are being taken to involve the hardcore poor in the development activities by providing them with temporary employment.

Initiatives are on the way for supplying food at fair price. Rationing system, Open Market Sale (OMS) of food grains and other distribution mechanisms have been introduced. Steps are being taken to make these arrangements more rationalised. Various steps have been taken to ensure food reserve. To build up stock, an initiative has been taken to procure food grains from overseas. It will help maintain farmers' earnestness and success for high level production and at the same time, build up a safe food reserve through import.

The government is firmly committed to maintain a stable macroeconomic environment fostering inclusive economic and social growth at a sustained and steadily growing pace. It is possible to make Bangladesh a country free from poverty and hunger, if the country can be upgraded to a 'middle income' country by 2020 in line with the vision of the government. For this, all the initiatives taken for poverty eradication must be expedited in the coming days. Campaign for 'financial inclusion' should be accelerated with the participation of poor and disadvantaged people as an effective weapon for poverty eradication; adequate credit flows should be ensured for social security and other productive pursuits including agriculture, SMEs and environment friendly projects; effective measures should be taken so that people can cope with the climate change. There exists a worldwide acclamation for Bangladeshi people for survival combating all odds. Their creativity is endless. Both society and government should create an environment of confidence for further advancement of this fighting nation. Let all of us strive to make this commitment meaningful.


Building Inclusive Green Economies: A New Development Partnership?*

Bangladesh is committed to pursuing low-carbon green development without comprising the imperative of faster economic growth and social development. Development strategies of Government of Bangladesh laid down in the Perspective Plan and the Sixth Five Year Plan declare clear commitment of pursuing sustainable growth. The country's vulnerability to floods, cyclones and to the threat of inundation of large coastal areas from global warming driven sea level rise makes sustainability a prime development concern. Financial inclusion drive at the central bank of Bangladesh has been contributing to eradicating poverty as well as sustained economic growth, enhancing social inclusion, improving human welfare and creating opportunities for employment taking into account national circumstances, objectives, responsibilities and priorities. We at the central bank have spearheaded mainstreaming of CSR in financial sector corporates, for them in turn to influence non financial real sector corporates into embracing CSR obligations. We have also issued 'green banking' guidelines equipping banks to make financing decisions based on prior environmental appraisal of investment projects. Concessional refinance support has been introduced for banks against their financing of environmentally beneficial projects, including renewable energy (bio-fuel, solar etc.) generation, effluent treatment, and adoption of more energy efficient emission minimizing production techniques.

Building Block 1: National economic and social policies

Bangladesh has made key policy interventions and has taken legal measures

* Bangladesh Bank Governor, Dr. Atiur Rahman participated as a panel speaker at a side event on "Building Inclusive Green Economies: A New Development Partnership?" organized be the Federal Ministry for Economic Cooperation and Development, Germany on 22 June 2012 as part of the United Nations Conference on Sustainable Development (Rio+20 Summit). Manish Bapna, Interim President, World Resources Institute facilitated the event as moderator. Other distinguished panel speakers included Dirk Niebel, Minister for Economic Cooperation and Development, FederalRepublic of Germany, Heidi Hautala, Minister for International Development, Finland, Ben Knapen, Minister for European Affairs and International Cooperation,Netherlands and Jim Leape, Director General, WWF International.


contributing to inclusive economic growth and poverty reduction. Policies relating to governance, economic and social development and environment have contributed to Bangladesh's capacity building for promoting economic, social and environmental sustainability.

Building Block 2: Local rights and capacities

Bangladesh's strides in development, in spite of daunting challenges, is largely due to human endeavor and entrepreneurship of its poor people within the framework of an enabling environment created by the government. A large number of CBOs and NGOs have also been making useful supportive contributions. In many cases, the quality of partnership between the government and civil society is exemplary.

Building Block 3: Inclusive green markets

The government of Bangladesh and the central bank are committed to offer enabling policy and institutional environment for business entrepreneurs through encouraging and supporting innovative business models targeted at expanding poor's access to markets and supply chains for green products and services. Under the financial inclusion campaign umbrella of the central bank, banks and financial institutions are being encouraged and supported in taking up financing schemes targeted to specific underserved areas, mainly agriculture, SMEs and environmentally beneficial projects. Creative partnership of banks with regulated Micro Finance Institutions (MFIs) and mobile phone/smart card based IT platforms towards devising new cost effective service delivery modes are being encouraged.

Building Block 4: Harmonized international policies and support

Joint efforts are needed to stimulate dialogues among developing country policymakers, development partners and other stakeholders on how best to promote sustainable green economic development. Though policies and actions have to be country specific, real and lasting progress can be made through collaborative efforts towards overcoming poverty and inequality and achieving sustainable human development.

Building Block 5: New metrics for measuring progress

The transition to an inclusive green economy will require new metrics that prevailing narrow focus on income poverty and Gross Domestic Product (GDP) way of tracking economic, social and environmental progress and well-being.

Public-Private Partnership

Bangladesh Bank has initiated guiding Bangladesh's financial sector towards socially and environmentally responsible financing by sensitizing banks and financial institutions about their Corporate Social Responsibilities (CSR), with a guidance circular for mainstreaming of CSR obligations in their corporate goals and objectives. The financial sector has responded with warm enthusiasm in steadily increasing engagement in CSR initiatives. Alongside monitoring of financial sector's progress in ingraining of CSR in corporate goals and objectives, BB has launched a comprehensive financial inclusion campaign to reach out with financial services to all hitherto underserved and excluded economic sectors and


population segments.

Under the financial inclusion campaign umbrella, banks and financial institutions are being encouraged and supported in taking up financing schemes targeted to specific underserved areas, mainly agriculture, SMEs and environmentally beneficial projects. Creative partnership of banks with regulated Micro Finance Institutions (MFIs) and mobile phone/smart card based IT platforms towards devising new cost effective service delivery modes are being encouraged. Besides making modest refinance support lines available against lending to the underserved sectors, Government of Bangladesh (GOB) and BB are supporting the inclusion initiatives of banks with facilitating regulatory and IT infrastructures, including establishment of a Microcredit Regulatory Authority for licensing and regulation of MFIs, issuance of Mobile Banking Guidelines, a secure and efficient payment system with fully automated platform for online clearing and settlement of paperbacked and electronic fund transfers, and a Credit Information Bureau (CIB) accessible online by system participants.

Refinance line for Renewable Energy

BB has introduced Taka 2.0 billion refinance line for financing solar energy, bio-gas and effluent treatment plant (ETP), at subsidized interest rate. Banks and non-bank financial institutions have already started to access BB's refinance line. Around Taka 600 million has been disbursed under BB refinance line.


Foreign Investment in Bangladesh*

Already growing faster than in earlier decades and steadily nearing middle income country GNI threshold, Bangladesh economy is aspiring for yet bigger quantum leaps in growth and poverty eradication. Bangladesh has positioned herself in global community as a forward looking nation, with firm footprint on path of steady, accelerating growth and development towards rapid poverty elimination and eventual prosperity. From the initial position as a primary goods producing small agrarian economy, Bangladesh has by now transformed into a globally integrated manufacturing economy and a leading apparels and textiles exporter gradually breaking grounds into newer areas like shipbuilding, light engineering, and IT enabled services.

Bangladesh has already earned acknowledgement as a vibrantly growing emerging economy. The most recent recognition is from UNDESA, as a 'rising star' in economic growth and fiscal discipline. Others include "Among 11 Global Growth Generators (3G)" by the Citigroup with projection of consistent growth rate of 7.5 percent through decades up to 2050.

Over the past 40 years, nominal GDP in USD has increased more than eighteen-fold, while the population has increased a little over two-fold. Real GDP growth averaged at around 6.0 percent annually over the last 10 years. Trade openness has integrated Bangladesh with global economy; with trade/GDP ratio rising from around 20.0 percent during the 1970s and 1980s to 40.7 percent in FY 11. Poverty has come down to 31.5 percent of the population now, from around 57.0 percent in the 1990s. Even against the backdrop of downbeat current global growth outlook, output activities in Bangladesh economy are powering ahead buoyantly; catering to strong domestic demand from domestic population base of 150 million. Exports and remittances continue to grow at double digit rates. Rising emigration from youthful population to labor markets abroad is bolstering external sector viability helping progress towards crossing middle income country group threshold by 2020.

The last decade (FY 2000 - FY 2010) has witnessed strong growth, more than doubling in per capita income, more than 500 percent increase in foreign

*Delivered in the meeting of 'Investment Forum', organized by Muktadhara Foundation, New York, USA, 30 June 2012.


exchange reserves, steady expansion in lending to the private sector, massive consolidation of external government debt and a material decline in the fiscal deficit. With an average growth rate of 6.0% over the past 10 years, Bangladesh outperforms most of its regional peers. Bangladesh has achieved high growth without the boom-bust cyclicality or volatility of some of its peers. This provides greater macro-economic certainty and facilitates policy-making.

Bangladesh has maintained consistent growth and has not defaulted on its internal or external debt obligations despite the Asian and global financial crises, oil price spikes, numerous political upheavals and many natural disasters. Bangladesh's remarkably steady growth performance is due in part to its well-diversified economy, insulating it from sector-specific shocks. In FY 11, manufacturing has grown by 9.5 percent, boosted by booming ready-made garment exports, with overall exports up 41 percent in FY11. The industrial sector grew strongly by 8.2 percent and service sector and agriculture sector grew by 6.6 percent and 5.0 percent respectively.

Access to foreign grants helps limit fiscal deficit. Consistently moderate fiscal deficits are financed by concessional foreign borrowings and a deepening domestic government bond market. Long maturity of foreign currency debt limits rollover and FX risks. Bangladesh possesses a favorable debt profile, with debt evenly split between domestic and external debt. A closer look at external debt reveals that most external debt is from multilateral and bilateral sources and on concessional terms, reducing overall debt servicing costs and thereby increasing debt sustainability Record accumulation of FX reserves coupled with stable flows associated with workers' remittances have insulated the country from serious Balance of Payments pressures.

How Bangladesh Bank is contributing to these positive developments? The 2009 financial crisis led Bangladesh Bank providing appropriately accommodative credit in order to avert sharp growth slowdown. Tightening stance started in late 2010 as inflation began to rise; monetary growth began to decline in 2011. Benchmark repo rate was increased by 325 basis points over the past 18 months and Treasury bill and bond yields have also risen to reflect market conditions. Interest rate of National Savings Certificates was increased and all lending rate caps were removed. Even with this more restrained stance, private sector credit growth is currently around 19 percent, above regional norms. Financial system has witnessed a strong improvement in its operations as evidenced by the increasing capitalization, reduction of non-performing loans and rising profitability. Strengthening of commercial bank lending discipline and the introduction of BASEL II have helped reduce systemic financial sector risk and is enhancing intermediation efficiency

Foreign investment in Bangladesh: facilities and opportunities

Bangladesh is strategically located as a potential hub of regional trade. Roads, bridges, and ports are being developed for facilitating transit routes for regional trade through Bangladesh. Regional energy grid is being developed for enhancing energy security. Bangladesh offers excellent opportunities and facilities for foreign investment. No prior permission is required for investment in industrial sector (except for four reserve sectors including defense equipment, reserve


forestry, atomic energy, currency printing and minting). Investment proposals need only to be registered with the Board of Investment (BOI). There is no ceiling on percentage of foreign ownership; both wholly foreign owned and joint ventures are permissible. Public Private Partnership (PPP) in infrastructure investments offers a new window of opportunity for foreign investors. Fully serviced existing Export Processing Zones (EPZs), and Special Economic Zones (SEZs) are being expanded and developed for export-manufacturing with duty free import of inputs. The capital market is open for foreign portfolio investment (FPI) by individual and institutional investors. The Foreign Private Investment (Promotion and Protection) Act, 1980 and a number of bilateral intergovernmental agreements protect foreign investments fully, with assurance of no expropriation or nationalization without fair compensation. Profits/dividends on FDI and FPI are freely repatriable, so are disinvestment proceeds (at market value for listed companies, at net asset value for unlisted entities) and capital gains. Capital gains are free of income tax. External trade has been liberalized in line with WTO rules, and Taka is fully convertible for current external transactions. Potential sectors for foreign investment include conventional power generation and renewable energy, infrastructure including roads, highways and bridges, ICT and business services, light engineering, pharmaceuticals, ceramics, garment and textile, leather and leather goods, service exports, tourism, hotels, and tertiary care hospitals.

Bangladesh's Perspective Plan up to FY 20 envisages transition from lower to middle income country group by 2020, in terms of GNI per capita. Beyond this, we are looking forward to crossing the upper middle income country group threshold by 2030. By 2050, we envision Bangladesh joining the global group of advanced economies. I believe, with extended support from foreign investors, particularly the NRBs, we will be able to make our vision come true. You know that, Bangladesh Bank recently has approved licensing of nine new commercial banks including three with NRB and six with indigenous sponsors to heighten the quality of financial services. We hope foreign exchange brought in as capital for the new NRB banks and the foreign-exchange position deposits they are likely to attract will strengthen the country's balance of payments and the overall health of financial sector.


Towards Bangladesh at 50*

Bangladesh will reach 50 years of age in less than a decade from now. It is a timely initiative of the Dhaka School of Economics and the Young Economists Association to hold this seminar series to take stock of where we are on the path to where we want our economy to be by then.

The vision for Bangladesh at 50 in the Perspective Plan of the government is of sustained stable inclusive growth lifting the economy out of lingering poverty onto middle income country group. The longer term goal is of course of emerging as a prospering advanced nation fully integrated with the global economy, by another 2-3 decades. Our macroeconomic trends are broadly on course towards attainment of these growth visions, even amid the slowdown in global economy since the global financial crisis.

Much of our growth related new investments will have to be attracted from abroad, heightening our financial sector's exposure and vulnerabilities to market volatilities in the global scene. In step with rising external exposures, our financial sector will need to build up and bolster resilience against shocks from perennial volatilities and instabilities of the international markets. Besides shocks of external origin, there are the also the demand and supply shocks of domestic origin to build up resilience against, particularly as the market based Taka Interest and exchange rates may move in adverse directions.

It would be pertinent to begin with brief recap of the background. Our financial sector became almost entirely state owned after liberation, dispensing directed loans at dictated interest rates. Exchange rates were also administratively prescribed. This regime left banks with little choice in credit risks to take up, and little in market risks to worry about. Over decades this has gradually transformed to a market based financial sector, under Bangladesh Bank's (BB's) guidance and vigil. By nineteen eighties local and foreign private sector banks started coming on the scene; lending and deposit interest rates were freed up early in the decade of nineteen nineties; credit priced according to fund costs and borrower risk profiles phasing out directed lending. By mid

*Paper titled 'Towards Bangladesh at 50: Financial Sector Resilience- Issues and Prospects', was presented in a conference organized by the Dhaka School of Economics held at Diploma Engineers' Auditorium, Kakrail on 6 October 2012.


nineteen nineties Taka was declared fully convertible for current international transactions; greater flexibility was brought about in exchange rate setting with a view to protecting external competitiveness. Restrictions on inflows and outflows of non-resident owned capital were done away with, except in short term Taka money markets. Transition to full market based flexibility of exchange rate of Taka in May 2003 marked the culmination of the liberalization processes.

The long sequence of major institutional and market reforms meant increasing range and complexity of risk exposures of our financial market participants, heightening vulnerabilities to domestic and external shocks. The traditional credit risk exposures to clients turned more complex with increasing external transactions, bringing in exposures also to their counterparties abroad; growing external transactions also entailed increasing credit and payment settlement risk exposures to correspondent banks abroad. Interest and exchange rate flexibility brought in market risks from rates volatility, interalia heightening liquidity risks from asset liability maturity mismatches. Operational risks of procedural glitches, frauds, forgeries, money laundering and regulatory breaches kept rising with growing complexities of financial transactions; technology risks from IT usage in coping with the complexities add to the operational risks.

Unless deftly managed and supervised, the slew of risks enumerated above can bring down banks and financial institutions, particularly in adverse macroeconomic or market conditions, severely undermining their solvency and liquidity. Examples of such institutional collapse are far from rare in financial history. Such institutional collapse can trigger systemic breakdown contagion to other institutions with exposure to an afflicted one. In the run up to the recent global financial crisis, aberrant motivations led many banks and financial institutions in advanced Western markets to misuse derivatives and other risk mitigation products for quick speculative gains. Troubles from resulting massive risk buildups in toxic assets beginning in a few large institutions spread quickly into others with exposures to these, bringing the entire global financial system to the brink of collapse.

In steering the sequence of the major market reforms mentioned above, Bangladesh Bank (BB) remained mindful about timely phasing in of appropriate prudential (capital adequacy, provisioning against asset impaired assets, liquidity, etc.) requirements and risk management practices; to build up and preserve necessary resilience against possible shocks from upcoming newer risk exposures. Credit risk weighted (Basel-I) capital requirements were introduced in the nineteen eighties, alongside new asset classification and provisioning requirements broadly in line with going international practices. Following introduction of market based flexibility in interest rates and exchange rates of Taka, BB supervisory staff teams worked together with commercial bank staffers in drawing up a set of guidelines for management of core risks in banking (credit risks, asset and liability/ balance sheet risks, foreign exchange risks, internal control/compliance risks, money laundering risks) in line with going international practices. These were introduced in 2003 as minimum required standards for banks, with BB's onsite and offsite supervision monitoring compliance. These guidelines have undergone further subsequent revision and updating, and a new set of guidelines for managing IT risks were issued in 2010. In line with global


developments in financial sector regulation, the credit risk weighted Basel I capital adequacy requirements in Bangladesh were replaced in 2010 by new Basel-II capital adequacy requirements weighted also for market risks and operational risks, besides credit risks. Heightened post global crisis concerns for financial stability has led to recent further revision of global best practice standards for capital adequacy and liquidity; the new Basel-III capital and liquidity framework seeks to enhance the level and quality of capital with higher emphasis on common equity in tier-I capital. The Basel III framework also introduces new leverage, liquidity coverage and stable funding coverage ratios to be maintained. Preparatory work for Basel III implementation in Bangladesh financial sector is ongoing, for full implementation by the 2018 deadline or earlier.

Heightened concern for financial stability following the global financial crisis has also brought into widespread usage the Stress Testing of resilience of financing institutions against probable shocks from adverse macroeconomic or market conditions. BB introduced quarterly stress testing routines in banks from 2010, to assess vulnerabilities of their capital adequacy and solvency in stress or shock scenarios. Stress testing guidelines issued by BB in April 2010 were updated in February 2011. Staffers in our banks and in BB supervision departments trying out stress testing exercises in our banks and in BB's supervision departments are at relatively early stages of learning curve, as work in progress. For some months now, onsite and offsite supervision set ups in BB are undergoing comprehensive overhaul and revamp; interalia including creation of a new Financial Stability and Integrity Department. BB's sustained, intensive thrust on motivation and training of supervisory staff is emphasizing supervision work in well coordinated inter-departmental team approach rather than each department working separately as silos. BB's supervisory reports are now more open for public information. Earlier, annual Supervision Reports used to be prepared solely for transmittal to Government. Following international practice, these are now being made public as Financial Stability Reports.

Time now to look at how our financial sector has fared in terms of resilience and stability under BB's evolving supervision approach outlined above. Since liberation the financial sector has grown several-fold in line with sustained steady economic growth. To mention just one banking sector indicator as illustration of the spectacular growth, credit and investment assets of the banking system totaling a puny Taka 7.07 billion in December 1972 stood 654-fold higher in December 2011, at Taka 4626 billion. Number of banks, and number of bank branches have likewise increased manifold; reaching out further with off-branch financial services to excluded population segments with the help of mobile phone/smart card technologies. Because of appropriate regulatory and supervisory attention on the expanding, developing financial sector; its stability has over years been proven to be quite robust amid episodes of regional and global crises like the East Asian currency crisis of mid nineteen nineties and the global financial crisis of 2008-2009. In both these crises our financial sector remained solvent and liquid, in position to help out the real sector rather than needing any bailout for itself. Institutional failures in our financial sector have remained relatively rare. In more than four decades since liberation, a joint venture private bank and two non bank financial institutions, all of these small sized, ran into asset quality and solvency problems due to weak management


and governance; needing BB supervised restructuring. In another episode the Bangladesh branch of an international bank had to be closed down and restructured due to irregularities abroad, despite unimpaired solvency of the local operations. None of these four episodes of BB guided restructuring involved any loss for depositors, nor did these involve any publicly funded bailout. The episodes did not raise systemic stability concerns as exposures of other market participants to the small sized afflicted institutions were not large. Fallouts on financial sector from two stock market price bubble collapse episodes of 1995 and 2010 were likewise limited and easily contained.

As of now, the 11 percent overall risk weighted capital base of our banking sector exceeds Basel II regulatory requirement. Non-performing loans as percentage of total assets are at single digit levels, liquidity stresses arising from unduly high advance deposit ratios in some banks last year have eased off. Stress testing exercises conducted by us and by WB-IMF financial sector assessment missions have assessed Bangladesh's financial sector as resilient against moderate shocks. This fairly reassuring overall view does not however mean that we now have no issue in financial sector stability and resilience to be concerned about. The overall picture masks considerable variation in capital adequacy and solvency positions between bank groups, with foreign banks maintaining capital cushions well above prescribed minimum and local private sector banks generally meeting requirements but state owned banks falling well behind in asset quality and capital adequacy. Even in local private sector banks the reported low non performing loan levels are due in part to somewhat looser local loan classification and provisioning requirements relative to international best practices. On the whole our financial sector continues suffering from (and to some extent sharing) the general deficiencies of local business culture in respect of corporate governance and financial disclosures. Although not serious immediate threats to institutional resilience and financial stability, these deficiencies limit capacities of our banks in forging strong, deep relationships in international financial markets to attract investment inflows in volumes needed for realizing the nation's growth aspirations. The recent BB revision of instructions on loan classification, rescheduling and provisioning are intended to address this shortcoming, by aligning our local standards with international norms. BB intends to work further with other regulatory authorities towards faster upgrading of corporate governance and disclosure practices in the overall business environment both in the financial and real sectors. Strengthening BB's supervisory oversight will continue to remain a high priority, including specifically on risk management, corporate governance, internal control and internal audit in banks. Exemption of state owned banks from some of BB's supervisory empowerments of Bank Companies Act stands in the way of effective supervision of these banks. Unless this differential treatment is done away with, management weaknesses from insufficient accountability are likely to linger in the state owned banks.

The discussion thus far has focused on regulation and supervision based bolstering of financial sector stability, but this stability also depends on macroeconomic balance and stability, domestic and global. The sustained stable growth of Bangladesh's economy owes largely to her balanced macroeconomic policies with cautious, responsible monetary and fiscal stances. Negative


spillovers from persistent macroeconomic imbalances in large globally dominant advanced economies were the main causes of collapse of financial stability in the global crisis. Forums of global authorities (like the G-20) are yet to make significant headway in reaching any agreement on safeguards to dissuade larger economies from creating global imbalances by pursuing lax domestic policies; particularly because these forums are more preoccupied with finding ways out of the lingering economic slowdown triggered by the crisis. But revamp of financial sector regulation and supervision will not by themselves be sufficient to ensure global financial stability if absence of meaningful reforms in the global economic order continue permitting larger economies pursuing lax policies with negative spillovers on global macroeconomic balance and stability.


Sustainable Production and Consumption of Energy Resources*

Poverty eradication and promoting sustainable patterns of consumption and production, and protecting and managing the natural resource base of economic and social development are the essential requirements for sustainable development.

This needs to be achieved by promoting sustained, inclusive and equitable economic growth; fostering equitable social and human development while promoting ecosystem conservation, regeneration and resilience in the face of current and emerging challenges.

Urban and rural citizenry and civil society groups/organizations can make important contributions to sustainable development activities by fostering energy efficient, environmentally sustainable output practices; and also by fostering sustainable consumption practices and ways of life.

Higher public and private investment in sustainable agriculture, land management and rural development will be needed to ensure sustainable agricultural production and productivity globally. Key areas for investment and support requires inclusion of sustainable agricultural practices; rural infrastructure, storage capacities and related technologies.

Bangladesh Context

Bangladesh is a low energy consuming country with per capita annual consumption of 220 KW hours supporting production of zero or low carbon emission energy generation. GHG (Greenhouse Gas) emission in Bangladesh is quite modest in comparison with most other developing and developed countries.

The Government of Bangladesh is trying to make the demand side management (DSM) of energy through energy efficiency and conservation measures involving making efficient appliances and equipment.

It is estimated that nearly 400MW power can be saved by changing fluorescent bulbs to CFLs and another 400MW by making electric fans efficient. Besides, nearly 30% load reduction is possible by increasing energy efficiency of

*Seminar on 'Sustainable Production and Consumption', 10 November 2012.


fridge and air-conditioners.

The government is investing substantially in renewable energy, particularly solar power and biogas for rural households and enterprises. The current electricity generation from Solar Home Systems (SHSs) in the country amount to 65 MW. The target is to install 2.5 million SHSs by 2014 through IDCOL.

Bangladesh plans to generate 5% of its electricity from renewable energy sources by 2015 and 10% by 2020. The government needs to focus on off-grid areas (60% of rural areas) for power generation through renewable to address poverty elimination and achievement of all the MDGs.

The government has taken steps set up a wind turbine based 15 MW power plant.

Banking sector initiatives towards sustainable production and consumption

Bangladesh Bank has issued guidelines for Environmental Risk Management and Green Banking in 2011 aiming at ensuring environment friendly business practices by banks and financial institutions.

Banks have been instructed to install solar power system while opening bank branches in rural areas.

BB has taken in-house initiatives to promote green banking including installation of 8 kilowatt solar power system on its rooftop. BB is using LED bulbs in Head Office to ensure efficient use of energy. Environmentally harmful incineration of non re-issuable damaged bank notes is being phased out, restoring instead of shredding by BB. Steps for measuring carbon footprint of BB's internal processes and operations are underway.

BB has advised banks to facilitate clients to open L/Cs for installation of ETP in industrial units, finance solar energy, bio-gas and ETP projects.

BB has introduced Taka 2.0 billion refinance line for financing solar energy, bio-gas and effluent treatment plant (ETP), at only 5% interest rate. BB has financed 18MW PV module manufacturing plant of Rahimafroz costs USD 4.5 million through BB green fund.

BB has introduced fully automated interbank clearing and settlement of interbank paper based and electronic fund transfers. This is hugely facilitating branch based, and mobile phone/smart card based banking.

Trust Bank has installed bio-gas plant to generate rural energy with 13 farm families in Manikganj. At present, total number of Bio-gas plant is 737 & disbursement stands at Taka 222.0 million.

Mutual Trust Bank Limited (MTBL) has two solar system powered branches. The bank has started 'MTB Green Energy' to finance renewable energy projects and 'MTB Krishi'. It financed 2 commercial bio-gas plants for power generation and a Hi-Tech project of 35KW Solar Power Plant in Gazipur.

Islami Bank Bangladesh Limited (IBBL) has set up Solar Panel on rooftop. Bank Al-Falah has installed first ever solar powered ATM booth in 2011.


Mechanization of Agriculture in Bangladesh*

Despite decreasing trend in the arable agricultural land, Bangladesh transformed herself into a almost food self-sufficient nation form the situation of complete import dependency mainly because of the mechanization of agriculture. Non-availability of updated data is one of the major problems in marking the degree of mechanization of agriculture in Bangladesh. The census data demonstrates dramatic progress in the use of power tillers and small tractors in recent time. Various indicators of mechanized cultivations like volume of irrigated area, magnitudes of power uses, and the uses of various agriculture machineries are used to visualise the extend of capital penetration/mechanization of agriculture in Bangladesh overtime.

J Irrigated area: In 2007-08, the irrigated area coverage by different irrigation equipment was about 61% of the net cultivable area (8.29 million hectares). About 80% irrigation is done by ground water and the rest by surface water (BADC, 2008).

J Power use: Level of energy input is one of the key indicators for measuring the state of mechanization. The available power in agriculture is seen to increase gradually from 0.32 kW/ha in 1984 to 1.17 kW/ha in 2007. Increased efforts to utilize solar energy for supply of household electricity for lighting and household water supply in the rural areas have been taken by government. The possibility to use solar energy for pumping water for irrigation is under active consideration. It is noteworthy to mention that Bangladesh Bank introduced a Refinance Scheme (revolving) for Solar Energy, Biogas, and Effluent Treatment Plant (ETP) of Taka 2 billion in August 2009. From this revolving fund, refinance facilities are allowed for banks/FIs against lending in the Solar Energy, Bio-gas & Effluent Treatment Plant. As of end-January 2013, BB refinanced a total of Taka 1.09 billion from this refinance line including Taka 505.4 million in solar energy, Taka 265.3 million in bio-gas, Taka 90.4 million in ETP and Taka 224.8 million in HHK technology-based brick making industry.

*'Workshop on Rural Mechanization:Policy and Technology Lessons from Bangladesh and other Asian Countries', Organized by Research and Evaluation Division of BRAC, 7 March 2013.


J Use of agricultural machinery: Use of agricultural machineries namely tractor, power tiller, deep tube well, shallow tube well and low lift pumps increased many fold in 2008 relative to anytime before. As per Agricultural Census of 2008, total number of those machineries increased to 7.3 million in 2008 from only 36.4 thousands in 1977. Besides, a huge number of manually operated weeders and sprayers are used in the country.

Mechanization of agriculture implies the use of various power sources and improved farm tools and equipment, with a view to reduce the drudgery of the human beings and draught animals. The contribution of agricultural mechanization has been well recognized in enhancing the production, productivity, cropping intensity together with irrigation, biological and chemical inputs of high yielding seed varieties, fertilizers, pesticides and mechanical energy benefiting small, medium and large size farms. Because of increased mechanization and higher productivity, the daily wage rate has increased substantially in recent time indicating broader employment opportunities for them as well despite the common argument that mechanization reduces the human employment.

Although mechanization is required for faster output and employment growth, it is not happening as expected due to various inherent drawbacks like, fragmented lands, poor buying capacity of farmers, lack of quality machines for farm operation, inadequate knowledge of the users about machines and insufficient awareness building activities.

Ways to address the challenges: To mitigate/remove the problems stated above, effective attentions are required so that full benefit of agriculture mechanization could be attained. As indicated in literature, following steps may be taken to address the challenges in agriculture mechanization.

J Formation of strong farmers group

J Strengthening custom-hire services of agriculture machinery

J Formulation of agricultural mechanization policy

J Establishment of a National Centre for Agricultural Machinery

J Special fund for machinery research

J Policy coordination among energy, industry and agriculture

J Reactivation of National Standardization Committee

J Review and rationalization of current tariff rates

J Global/regional cooperation.


*'Bangladesh: Recent Macroeconomic Trends & Prospects' a discussion presented in Citibank, New Delhi, India, 3 May 2013.

Bangladesh: Recent Macroeconomic Trends & Prospects*

The last twelve years have witnessed strong, stable growth and more than doubling of per capita income. Progress has become increasingly recognized, resulting in Bangladesh being named a "Next 11" country by Goldman Sachs, "Frontier Five" nation by JP Morgan and "The Next Frontier" by HSBC

Note - Bangladesh fiscal year runs from July to June

Source: Bangladesh Bank

Robust Growth Pushing Per Capita Incomes Higher

With an average growth rate of 6.2% over the past 5 years, Bangladesh outperforms most of its regional peers Sustained robust growth on accelerating path

FY2000 FY2012FY2000 –FY2012

Nominal GDP (US$ bn) 47.1 115.6 “245%

GNI Per Capita Income (US$) 377 838 “222%

International Reserves (US$ bn)

1.6 10.34 “646%

Private Sector Credit/GDP (%) 21.3 44.6 “23.3

External Govt. Debt / CAR (%) 173.9 52.2 ”121.7

Government Debt / GDP (%) 46.4 37.2 ”9.2

-6.1 -5.1 ”1.0

23.0 25.5 “2.5 Investment / GDP (%)

Budget Deficit excl. grants (%)


8.0%

4.9%

FY19

99

FY20

00

FY20

01

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

Real GDP growth

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

FY20

12

5.9%

5.3%

5.3% 5.

7%

6.3%

6.3%

6.0% 6.

4%

6.2%

6.1%

6.7%

6.6%

4.4%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

1000

369

377

374

378 41

1 440 46

3

476 52

3

608 67

6

751 81

6 838

900

800

700

600

500

400

300

200

100

0

FY1

99

9

FY2

00

0

FY2

00

1

FY2

00

2

FY2

00

3

FY2

00

4

GNI Per Capita (US$)

FY2

00

5

FY2

00

6

FY2

00

7

FY2

00

8

FY2

00

9

FY2

01

0

FY2

01

1

FY2

01

2


Steady rise in per capita income bodes well for future economic growth Bangladesh has maintained consistent growth and has not defaulted on its internal or external debt obligations despite the Asian and global financial crises, numerous political upheavals and countless natural disasters

Source: IMF, World Economic Outlook Database, Oct 2011

Well-Diversified Sectoral Distribution of GDP

Bangladesh's remarkably steady growth performance is due in part to her well-diversified economy, cushioning it from sector-specific shocks

FY12 Sectoral Share of GDP: Agriculture (19.3%)

Cyclone2B:Casualty: 400 people8,000 cattle

Tropical Cyclone 04B:Casualty: 650 people17,000 cattle.

Real GDP Growth %

7

6

5

4

3

2

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Very Severetropical

Cyclone BOB 01

Most severe flooding in modernhistory : 66% of the land affected,1000 deaths 26,000 livestock lost,

16,000 km roads damaged.

Natiral Disasters External Shocks Real GDP Growth% Linear Trend line (Real GDP Growth)

Severe Floods: 36% of thecountry flooded 36mn

people affected.

Cyclone Sidr: 3500 people killedMajor floods: 500 died, 30% of thecountry affected

Tropical catastrophiccyclone

AsianEconomic

Crisis

Very severe cyclonic storm BOB06:300,000 affected,

8755 homes destroyed

Slowdownafter9/11

MFAPhase Out

Oil Pricereaches>$100/b

EconomicCrisis

Mining andQuarrying 1.30%

Mining andQuarrying 1.30%

Construction9.30%

Construction9.30%

Power, gas andwater supply

1.70%

Power, gas andwater supply

1.70%

Manufacturing19%

Manufacturing19%


FY12 Sectoral Share of GDP: Industry (31.3%)

FY12 Sectoral Share of GDP: Services (49.5%)

Source: Bangladesh Bank Annual Report 2012

Animal farming2.50%

Forest andrelated services

1.70%

Fishing4.40%

Crops andhorticulture

10.70%

Health andsocial work

2.50%

Education2.80%

Publicadministration

and defence2.90%

Financialintermediations

2.10%

Hotel andrestaurant

0.70%

Community, social and personal

services6.60%

Wholesale andretail trade

14.30%

Transport, storage and

communication10.70%

Realestate, renting

and otheractivities

6.90%


Robust Growth Contributing to Significant Poverty Reduction

Large reductions in poverty witnessed in the past decades

Percentage of Population Below Upper Poverty Line

More still needs to be done, especially for the extreme poor

Percentage of Population Below Lower Poverty Line

70

60

50

40

30

20

10

0

56.6

48.952.3

35.240

43.8

28.431.5

35.2

21.3

1991-92 2000 2005 2010

Rural UrbanNational

58.7

42.7

50

45

40

35

30

25

20

15

10

5

0

4143.7

23.6

34.337.9

20

25.128.6

14.617.6

21.1

7.7

1991-92 2000 2005 2010

Rural UrbanNational


J Population in poverty fell from 61.6 million in 2000 to 44.8 million in 2010

J Inequality measure has stayed constant (consumption Gini 0.33) over ten years promoting social cohesion

Source: HIES 2005, 2010

Steady Improvement in Social Outcomes due to Long-standing Government - NGO Partnerships

Monetary Policy Shifts Based on Forecasts of Key Economic Risks

J Accommodative policy stance following the 2009 financial crisis and policy tightening began in late 2010 as inflation began to rise

J Sufficient credit is being provided to the private sector to support growth; credit grew at around 19% in FY12

J Bangladesh Bank consults widely before deciding monetary stance

1991 2010/ Latest

Fertility rate, total (births per woman) 6.72 2.25

Mortality rate, infant (per 1,000 live births)

96 38

Life expectancy at birth, total (years) 59.99 68.63

Malnutrition prevalence, height for age (% of children under 5)

76.70 43.20

Literacy r ate, adult total (% of people ages 15 and above)

35.32 55.90


Inflation is Edging Down

Declining inflation throughout 2012…

Inflation (Average vs. Point to Point), 2011-13

Driven by falling food and non-food inflation

Inflation (Point to Point), 2011-13

Bangladesh : Repo rate, Growth in reserve money and Private sector credit

Policy Rate: Repo Rate (%)

10.0

8.0

6.0

4.0

2.0

0.0Q1

2006 2007 2008 2009 2010 2011 2012

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

40.0

32.0

24.0

16.0

8.0

0.0

Repo

Rat

e

Rese

rve

Mon

ey a

nd P

rivat

e se

ctor

cre

dit g

row

th

8.00 8.25

8.25

8.25 8.50

8.50

8.50

8.50

8.50

8.50

4.50

4.50

4.50

5.50

5.50 6.

00 6.75 7.

257.

25 7.75

7.75

7.75

7.75

8.75

8.759.00 9.25

9.25

Reserve Money Growth [% y/y, RHS]

Perc

ent

12.00

11.00

10.00

9.00

8.00

7.00

8.00

7.74

12-Month Average

Point to point

Jan-

11

Jul-1

1

Jul-1

2

Sep-

11

Sep-

12

Jan-

12

Jan-

13

Mar

-...

Mar

-...

Mar

-...

May

-...

May

-...

Nov-

...

Nov-

...


Single digit inflation (FY 13 Budget target of 7.5%) is key economic policy objective. Close coordination between fiscal- monetary policy contributed to the

downtrend attained

Update on Monetary Program

J NFA growth increasing monetary base which cannot be fully sterilized - repo rate reduction should transmit to retail rates and help stimulate private sector growth

Monetary Aggregates (Y-o-Y growth in percent)

Actual Jul'12 MPS Prog.

Jan'13 MPS Prog.Items

FY10 FY11 FY12 June 2013 June 20131. Net Foreign Assets 41.0 6.2 13.4 0.9 14.02. Net Domestic Assets 19.0 24.7 18.1 19.0 18.4

Domestic Credit 17.5 28.2 19.3 18.6 18.9 Public sector credit -4.2 38.3 17.5 20.8 20.3 Private sector credit 24.2 25.8 19.7 18.0 18.53. Broad Money 22.4 21.4 17.4 16.5 17.74. Reserve Money 18.1 21.0 9.0 13.8 16.1

Perc

ent

16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

8.30

7.74

6.79

Jan-

11

Mar

- 11

May

- 11

Jul-

11

Sep-

11

Nov

- 11

Jan-

12

Mar

- 12

May

- 12

Jul-

12

Se[-

12

NO

v- 1

2

Jan-

13

Mar

- 13

General

Food

Non-Food

80%

60%

40%

20%

0%

50%47%

41%

55%52%

39%33%

25%26%

40%35%35% 35%

26%27%

10%

World East Asia andPacific

South Asia Bangladesh India Pakistan Sri Lanka

Account at a formal financial institution (%age 15+)

69% 67%

58%

3% 4%


Stable Financial Sector

J Financial sector is stable and when compared with data even five years ago it remains on a firmer footing

J Unusual increase in NPLs (and relative decrease in ROA & ROE) in 2012 was largely due to the implementation of new loan classification policy from Dec'2012 and a fraud in a branch of a state-owned bank

Measures to strengthen financial sector supervision

J New loan classification/provisioning guidelines introduced in line with international best practices

J New electronic dashboard provides real-time information on key trade-financing transactions

J Recent appointment of a fraud-detection advisor who is building BB and bank capacity in this area

J Recent use of 'anonymous consumer surveys' to cross-check banking information and follow-on action by BB

J Quarterly performance reports of SCBs disclosed on web

Impressive Financial Inclusion progress

Accounts at a Formal Financial Institution (% age 15+)

Source: Global Financial Inclusion (Global Findex) Database, World Bank, April 2012

Banking Sector Indicators Major Indicators 2007 2008 2009 2010 2011 2012 Risk Weighted Capital Asset Ratios (%) 7.37 10.05 11.67 9.31 11.35 10.46 Gross NPL Ratio (%) 13.23 10.79 9.21 7.27 6.12 10.03 Net NPL Ratio (%) 5.13 2.79 1.73 1.28 0.70 4.38 Return on Assets (ROA) (%) 0.89 1.16 1.37 1.78 1.54 0.64 Return on equity (ROE) (%) 13.78 15.60 21.72 20.97 17.02 8.20


Fallouts of 2010 Stock Market Bubble-burst contained

J As in other fast growing countries with relatively new stock markets,

Bangladesh experienced a stock market boom, with the DSE GEN index

seeing gains of +78.8% in 2010 over 2009

J Authorities decided to gradually let air out of what they felt was becoming

a bubble, with the result that in 2011, the market experienced price

corrections.

J Despite reports of bank credit being diverted to speculative activities, total

bank exposure to the stock market was only 3.65% of total liabilities, well

below the 10% regulatory threshold. Knock-on systemic effects have

therefore been negligible

Dhaka Stock Market History (end of period)

Robust Growth in Domestic Debt Market

4000350030002500200015001000

5000

63 64 71 98

22.5

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

234 323 754 1,060

1,870

3,465

2,056

1,836

Market Cap (BDT'bln)

1000

900

800

700

600

500

400

300

200

100

0

FY05 FY06 FY07 FY08 FY09 FY10 FY 11 FY 12

28-day2-year

91-day5-year

182-dayBG 5-year

364-dayBG 10 year


Regulators are creating a favorable bond underwriting and trading environment

Robust growth in bond market Outstanding T-bill/bond Maturity mix (Figures in Taka bln)

Rapid structural reforms to deepen debt markets and ensure market driven price discovery

J Introduction of electronic/online bidding system for treasury bills and bonds.

J Abolition of lock-in period for foreign investors in Treasury Bond market

J April 2013 saw large US institutional investor purchase a 5 year T-bond on secondary market via the Dhaka branch of a foreign bank

J Significant investor interest in these instrument as currently many of these instruments have double-digit yield

Sustainable Fiscal Stance due to Prudent Management

Moderate deficits and higher revenue collections have resulted in lower government debt ratios

Moderate fiscal deficits are in line with those of developing countries

Fiscal Balance (% of GDP)

Rapid growth and moderate deficits have resulted in lower debt ratios

Budget Deficit including grants / GDP

0%

-4.1%-3.7%

-3.4%-3.4%-3.7%

-3.2% -3.3%-3.3% -3.4%-3.9%

-4.0%-4.4%

-3.7%-5.4%-4.1%

-3.7%-3.9%

-4.4%-4.2%-4.2%

-4.7%-5.1%

-6.2%

-3.3%

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12-1%

-2%

-3%

-4%

-5%

-6%

-7%

Budget Deficit excluding grants / GDP


Public Debt (Taka bn) and Debt Ratios (% of GDP)

Domestic Revenue Mobilization Efforts are Paying Dividends

J Steady increase in total domestic revenue from 10.9% in FY10 to 12.4% in FY12 and a projected 13.3% in FY13

J Projected to rise to 14.5% of GDP by FY15.

J Passage of a new Value Added Tax (VAT) law in 2012 - revenue increases will result from considerable broadening of the tax base, as the main VAT rate (15%) is unchanged

J Other reforms include greater automation (e.g. of Taxpayer Identification Number issuance) and on-going work on a new direct tax code

Government's FY 13 Bank Borrowing well contained

1,800

1,500

1,200

900

600

300

0FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Domestic Public Debt (Bn Taka)Foreign Public Debt (Bn Taka)

Govt. Debt / GDP

48.2

%

47.0

%

46.7

%

44.8

%

42.9

%

41.0

%

7.1%

60%

50%

40%

30%

20%

10%

0%

Govt. Borrowing (Net) from the Banking System during FY12(upto February 2013)

Billi

on Ta

ka

250

200

150

100

50

0

-50

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Apr-

12

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Jan-

12

Feb-

13


J Given these trends, government borrowing from banking sector should remain within FY13 Budget target of 201 billion taka

External debt service burden low, being largely concessional

Bangladesh possesses a favorable debt profile, with debt evenly split between domestic and external debt. A closer look at external debt reveals that most external debt is from multilateral and bilateral sources and on concessional terms, reducing overall debt servicing costs and thereby increasing debt sustainability

Domestic vs External Debt

53% 47%

Domestic Debt. External Debt.

10.41%

0.77%1.99%

2.67%

84.15%

Multilateral OECD OPEC Others Suppliers Credits


Breakup of External Debt by Lender

Robust Export Growth

J Bangladesh exports have grown over 400% in the past decade

J Apparels exports dominant, comprising over 75% of total exports.

J Other items (e.g. pharmaceuticals, jute, leather products, IT services, shipbuilding etc) entering export basket

J Export growth sustained even in current global slowdown, 10.2% growth during July-March FY13

Exports (US$ bn)

Source: Bangladesh Bank, McKinsey & Co. report "Bangladesh's ready-made garments landscape: The challenge of growth"

Growing and Geographically-Diverse Remittances

Workers' remittances originate from all regions of the globe, limiting risks from downturn in any one country or region. 20% growth in H1FY13, crucially underpinning domestic demand

Remittances by Source Country (US$ mn)

US$

bn

30

25

20

15

10

5

0

6.0

2001..

2002..

2003..

2004..

2005..

2006..

2007..

2008..

2009..

2010..

2011..

6.5 7.6 8.710.5 12.2 14.1 15.6 16.2

22.9 24.3

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

Others

Singapore

Malaysia

U.K.

U.S.A.

Kuwait.

Bahrain

Oman

Qatar

U.A.E.

Saudia Arabia

2005-20062006-20072007-20082008-20092009-20102010-20112011-2012


Source: Foreign Exchange Policy Department, Bangladesh BankExternal Balances Significantly Better Than Previous Year

Exchange Rate Used to Absorb External Pressures

Exchange rate flexibility helped curb reserve losses, deal with BoP pressures, and improve competitiveness

Exchange Rates, Jan. 2006- Jan. 2013

(2005=100)

Record Levels of Foreign Exchange Reserves

Reserves cover 4.5 months of imports and is expected to grow further in FY2013

Items FY11 FY12July 2011 -Jan 2012

July 2012 -Jan 2013

Export(% changes) 41.5 5.9 14.3 8.8 Import (% changes) 41.8 5.5 15.6 -6.8 Remittances(% changes) 6 10.2 -2.1 19.7 FDI (in million USD) 768 995 780 875Overall Balance (in million USD)

-655 494 -813 2928

Forex Reserve (in million USD, end of period)

10,912 10,364 9,386 13,076

Exchange Rate (Tk./USD, end of period)

74.2 81.9 84.4 79.2

140130120110100

90807060

2006

2007

2008

2009

2010

2011

2012

2013

60

65

70

75

80

85

Real effective exchange rate (LHS) Taka per U.S. Dollar (LHS)


International reserves have reached record levels

External Debt Remains Comfortably Serviced

Reserves have grown ten-fold since 2001 while debt servicing ratio has improved

14.0

13.0

12.0

11.0

10.0

9.0

8.0

10.410.9

9.910.3

9.3 9.410.1

Jul.

11

Aut

.11

Sept

. 11

Oct

. 11

Nov

. 11

Dec

. 11

Jan.

12

Feb.

12

Mar

. 12

Apr

. 12

May

. 12

Jun.

12

Jul.

12

Aug

. 12

Sept

. 12

Oct

. 12

Nov

. 12

Dec

. 12

Jan.

13

Feb.

13

Mar

. 13

9.6 9.5

10.4 10.6

11.411.3

12.311.8

12.8 13.113.8 14.0

10.29.6

Foreign Exchange Reserves (US$ bn)

12000

10000

8000

6000

4000

2000

0

7%

6%

5%

4%

3%

2%

1%

0%

6%

1583 24

69.6

2705

2930 34

83.8

6% 6%

5%

4%

FY01FY02FY03FY04FY05FY06FY07FY08FY09FY10FY11FY12

Gross officialreserves(million US$)(LHS)

External Principal+Interestrepayments/CAR%(RHS)

4% 4%

3% 3% 2.9%2.5% 2.4%

6148

.8

7470

.9

1074

9.7

1091

2

1036

4

5077

.2

45000

40000

35000

30000

25000

20000

15000

10000

5000

0

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Govt. External Debt CAR Govt External Debt/CAR%

200%

180%

160%

140%

120%

100%

80%

60%

40%

20%

0%

174%

155%164%

156%147%

130%

107%95%

82%75%

67%57%

54%


Decade snapshot: 40% Debt growth vs. CAR growth of 350%; leading to significant reducing in Debt / CAR ratio

ECF program with IMF supports reforms and provides external cushion

J Approval of IMF's Executive Board of a three-year arrangement under the Extended Credit Facility (ECF) in mid-April 2012 for an amount of SDR 639.96 million (US$987 million at the time of program approval)

J The objective of this program is to maintain macroeconomic stability, build external buffers and promote higher growth through a set of economic policies and reforms focused on:

- Pursuing sound fiscal and debt management

- Ensuring stable monetary and exchange rate conditions

- Strengthening the financial sector

Overall growth and development challenges on path ahead

J Infrastructure bottlenecks - more progress and higher investment levels are necessary to reach the nation's true potential

J Skilled labor - A challenge for domestic manufacturing and higher-end service sector, higher education levels and development of human capital are needed for Bangladesh to move up the value-added chain

J Climate change - While Bangladesh is strengthening its adaptation and mitigation efforts, climate change and natural disasters remain key areas of risk. Bangladesh will continue to work with development partners to minimize and mitigate the impacts of these critical problems

J Investment needs - Higher domestic and foreign investment needed in all sectors for achieving sustained higher growth rates, for which Bangladesh maintains very congenial policies

Investment in Transportation Key for Investment and Growth

Roads/ Bridges/ Railways

J Government has adopted 20-year Road Master Plan and similar one for railways is in progress

J Following are some of the projects in progress:

J Upgrading of Dhaka-Chittagong High way into 4 lane is in progress

J Concessional loan of $1.04 billion signed in March 2013 with JICA to build new bridges on Dhaka-Chittagong route

J Dhaka flyovers and new routes have opened recently (Hatirjheel/Banani)

J Construction of Shah Amanot bridge over the river of Karnafuli has been opened for traffic

J Connection with Trans-Asian Railway Network: Government is in process of constructing new railway track of about 128 km to ensure


this integration

J Mass Rapid Transit Line plan in place with Japanese funding

J Alternative funding for Padma Bridge being arranged

Energy

J Power System Master Plan (PSMP),2010 targets generation of 24,000 MW in 2021 against demand of 20,000 MW, and 39,000 MW in 2030 against demand of 34,000 MW

J 5,000 MW nuclear power generation planned under agreement with Russian Federation, of which 2000 MW by 2018

J 2,600 MW coal-based power plants will be setup in joint ventures

J 1.8 million solar home systems already installed - growing further at fastest rate in the world (World Bank 2013)

J Several international oil companies currently engaged in exploration activities, new off-shore blocks to be tendered within FY13

Bangladesh's demographics- both challenge and opportunity

J Although population growth is now 1.5 % per year, the working age population is growing at 2.5-2.8 %

J Bangladesh has reached replacement level population growth (UNFPA 2012)

J Demographic window of opportunity is also a challenge for which greater job-creating investments are needed

Benign, welcoming FDI policy regime

Foreign investors have the same access as local investors to:

J All industrial sectors excepting the reserve sectors of armaments, nuclear

95-9990-9485-8980-8475-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-14

5-90-4

(million)-10 -8 -6 -4 -2 0 2 4 6 8 10

Women Men

300

250

200

150

100

50

0

Population(LHS) &its growth (RHS)

mill

ion

total

working age

total

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

working age

%

2050204520402035203020252020201520102005199519901985198019751970

2005


power, security printing and minting and forestry

J New investments require only a registration with BOI

Foreign investors have the same access as local investors to:

J working capital and foreign exchange current external transactions in local market

J term borrowing from abroad with prior BOI approval

J tax holiday for specific sectors as allowed from time to time by the Government (up to June 2015 on earnings from IT enabled services)

J Retention of part of export earnings in foreign exchange retention quota accounts, depending on local value addition content

J FDI can come in as wholly foreign or joint venture

J Post tax profits/dividends on FDI freely repatriable

J FDI disinvestment proceeds including capital gains freely repatriable

J Expatriates working in Bangladesh can repatriate up to 75 percent of post-tax salaries on a regular basis

J Can invest savings in Bangladesh government securities, and

J Can convert accumulated savings for repatriation in foreign exchange while leaving Bangladesh

Bangladesh authorities proactive in supporting investment initiatives

J Bangladesh Government and Bangladesh Bank remain proactive in promptly sorting out problems for both foreign and local investment as they arise from time to time.


Green Financing for Sustainable Development*

Green or sustainable banking has been identified as one of the major drivers of sustainable economic growth in developing countries. Bangladesh Bank's Corporate Social Responsibilities (CSR) mainstreaming guidance of 2008 highlighted environmental sustainability issues along-side those of social and financial inclusion.Our financial inclusion drive in particular SRF campaign for providing access to small and medium enterprises has helped us robust inclusive growth and financial stability despite of global financial crisis. This was followed by indicative policy guidelines of 2011 specifically on instilling green banking practices, both in internal processes and in environmental impact assessment of financing proposals. I must thank IFC for working with us and providing deeper support for this outcome. IFC is also very active in attracting other forum of FDI and FPI for credible private corporates and entraprenurs of Bangladesh including FIs. Bangladesh Bank as a central bank took utmost care to kick the process off with setting examples in its own practices.

We are committed to pursuing digital, nearly paperless, sustainable, green banking operations by making best use of the information technology and related professional skills. Our different initiatives particularly IT based green banking activities through online banking, e-banking, e-commerce, online CIB, automated clearing house, e-tendering, e-recruitment, etc are moving ahead in full swing. Our new 'publications rationalization' committee has recently eliminated the printing of five major statistical publications and has instead put them up on-line.

Green financing requires thorough due diligence under Environmental Risk Management (ERM) Guidelines and I am glad this conference will be discussing multi-country experiences of implementing these guidelines. Energy efficiency has received significant attention of Bangladesh Bank in recent years. BB began this by launching an initiative of mainstreaming socially responsible corporate ethos and objectives in the financial sector to set motivations right; following up with two thrusts on financial inclusion and environmentally sustainable 'green' financing. All banks and financial institutions, local and foreign owned, private and public sector, have engaged enthusiastically in both the thrust initiatives. In

*International Sustainable Banking Conference 2 November 2013, Jointly Organized by Bangladesh Bank and IFC, Radisson Blu Garden Hotel, Dhaka.


green financing lenders routinely take up environmental impact assessment of investment proposals, factoring in environmental risks in their financing decisions; denying financing for environmentally risky undertakings lacking in adequate mitigation measures. Besides this environmental screening of borrowing proposals, green financing promotes adoption of new energy efficient, GHG emission minimizing output processes and practices. Banks in Bangladesh have been advised to finance solar energy, bio-gas plant, ETP and Hybrid Hoffman Kiln (HHK) in brick field under refinance programs. We introduced Taka 2.0 billion refinance line in FY 2010 against bank loans for investments in solar energy, ETPs and biogas plants from our own fund.

Allow me to focus a bit on the biogas plant story that possibly could give us an idea of how using renewable energy may be an effort but could be a part and parcel of green economy over time. As you may be aware, each bio-gas plant is based on a bio digester fed with organic waste produced by cows; besides biogas as fuel for cooking and lighting, the plant owners are getting other important by-products from their investments; from organic manure, to the milk and calves produced by the cows which are valuable protein sources for household consumption and commercial use. Besides reducing dependence on fossil fuels, these plants are thus promoting soil fertility and raising rural incomes. Subject to the availability of adequate grazing land, the plants can be scaled up to larger units producing bio-gas as fuel for electricity generation, running irrigation pumps and so forth. With reasonable attention to upkeep and maintenance, these plants would generate enough income and savings enabling debt servicing on the plants without stress. Poultry waste is yet another input for biogas plant where banks have come forward. Nonetheless, to keep interest costs on borrowing low for those setting up bio gas plants, BB is providing refinance at five percent interest per annum to the lending banks, from the Taka 2 billion fund discussed earlier.

Now, I would like to focus on the challenges ahead. All banks have their general credit policy for the lending sectors. But the nature of the different sectors is different from the environmental perspective. For example polluting industries like tannery differs from the investment in poultry. So, preparing sector specific environmental policy guideline for the banks is a big challenge. Quantifying environmental risk rating is another challenge. Hence capacity building on environmental issues for both the central and the commercials bankers for structured green banking practices and Green Reporting Initiatives (GRI) is required.

However the biggest challenge is one of mind-set and attitude. For a start the mind-set amongst bankers should not be that Environmental guidelines are damaging for growth of the business and a hindrance - its in your own interest too for long run growth of your profits. At the Central Bank it isn't the introduction of technology which only matters but increasingly its the softer skills. I am encouraging my colleagues to communicate with each other by email and in discussion groups instead of writing paper files and sending them upstairs though a standard approach. Also I have instructed colleagues not to issue paper-invitations or send hard copy greetings cards but to send them electronically. But its not enough to give people Ipads, we need to ensure that they use them at


work to take notes, make presentations, show data during meetings.

My special thanks must go to the financial leaders of foreign countries and IFC officials who travelled here to join this conference. I am sure this conference will provide a unique opportunity to exchange views on risk and opportunities of green financing for sustainable development and learns from each other how best we can contribute towards adopting SDGs for 2015 and beyond as envisaged by UNGA this year.

PART EIGHTGlobal Economic Issues


Asian Clearing Union*

Here I wish to highlight on how Bangladesh economy is faring in the ongoing global financial turmoil and recession; and on the aspects of the ACU settlement arrangement that shield ACU intraregional trade from difficulties like the recent trade finance freeze-ups in many major financial markets. My first impression as a new observer is that these strengths of ACU settlement arrangements bear promise of further benefits, with appropriate extension/ modification.

Because of the limited openness of Bangladesh economy particularly to short term capital flows, the domestic financial market has remained free of toxic assets and contagion from the global financial turmoil.

Liquidity and credit availability remain normal, with no episode of any bank run or credit crunch. Outflows from the modest non-resident equity holdings in the local stock markets remained moderate, and the decline in stock price indices were much lower than those in markets in neighboring countries. Rather than themselves needing to be bailed out, banks in Bangladesh are in a happy position to help the real economy in coping with the fallouts of global recession triggered by the financial turmoil. The impact of global economic recession on the real economy has also thus far remained moderate.

Export growth has slowed somewhat, but is still in double digits (14.5 percent y-o-y in the first three quarters of FY09), thanks to sustained growth in apparels exports. Migration of workers to job markets abroad has slowed, and there are sporadic episodes of return of laid off migrant workers. However, workers' remittance inflows are still buoyant, growing 22.7 percent y-o-y in first ten months of FY 09. With low food grain imports in FY 09 because of good domestic harvests and with other imports costing lower in the downturn of global prices, imports in the first three quarters of FY 09 grew y-o-y by 12.5 percent. Sustained uptrend in BOP current account surplus and foreign exchange reserves have meant some appreciation pressure on Taka, which the BB is easing with regular foreign exchange purchases from the inter-bank market.

*The 38th Meeting of the Board of Directors of Asian Clearing Union, Colombo, Sri Lanka, June 16-17, 2009.


Government's deficit financing of budget (3.81 percent of GDP in FY 08) remain moderate by regional standards, and has consistently remained under four percent since FY 03. CPI inflation reached double digit levels in FY08 (point to point annual inflation peaking at 11.59 percent in Dec 07) with upsurge in global commodity prices, but started edging down in FY 09 as the global prices abated. Bottoming out at 5.04 percent in March 09, it crept up to 5.34 percent in April 09. Domestic demand has held up well in FY 09, with good domestic output response. Real GDP growth for FY 09 is projected at 5.9 percent, against 6.2 percent growth of FY 08. A declining trend in capital machinery imports in FY 09 signals slack in investment momentum however, with implication for growth, going forward. The pace of new investments for power, gas and other infrastructure facilities has lagged behind the steadily increasing demand pressure arising from the growth momentum of the recent years, and the deficiencies are hampering new investments in productive pursuits.

Unless the global economy recovers rapidly, FY10 is likely to be more challenging for the Bangladesh economy.

Bangladesh economy will be impacted significantly in FY 10 if the global recession persists. Export growth may weaken and even swing to negative, with redundancies in the export production sectors. Return of migrant workers laid off in recession-ridden host countries may decrease significantly; workers' remittance inflows and investment momentum may weaken, dampening domestic demand and output. In preparedness for facing a prolonging of the global downturn, the government and the central bank in Bangladesh are committed to people-focused interventions; co-opting initiatives of the financial system including microfinance NGOs. About a third of the government's annual budgetary outlays are typically allocated for pro-poor social sector expenditure including safety net programs for the weak and vulnerable population segments, and also for financing self-employment loan programs of nominated microfinance NGOs. Despite resource constraints, the still rudimentary social safety net programs are being expanded steadily in coverage. To cope with a prolonging of the current global downturn, substantial increase in public expenditure will be needed to pick up the likely slacks in investments and in domestic and external demand. The government has already announced (in Q4 FY 09) a modest support package mainly targeted at export sectors already hurt in the downturn; and the FY 10 budget is expected to provide more comprehensive allocations, including extended coverage of the social safety nets and temporary new job creation in rural and urban public work programs, besides continued appropriate support for businesses hurt in the downturn. For financing the additional public expenditure outlays, increased concessional external support from MDBs and bilateral official sources will be helpful in preserving debt sustainability over the medium term. SMEs are typically less capital intensive and short gestation options for creation of new employment and output, and the financial sector in Bangladesh (including microfinance NGOs) isextensively engaged in financing SMEs, supported by refinance lines from the central bank (BB) and from public funds through government sponsored organizations like the PKSF. MDBs like the WB and ADB are also co-financing the refinance pools. The government and BB has also placed special emphasis on the agriculture sector in generating new employment and output; BB has made


engagement in agricultural financing mandatory for all banks, with refinance support available if and where needed. BB has also acted to heighten awareness of corporate social responsibility in the financial sector to promote its spontaneous proactive engagement in programs helping out population segments hurt by natural disasters, social iniquities or man-made debacles like the current global recession.

Even in the global financial turmoil, ACU settlements are growing much faster than the rate of growth of global trade, eliciting the strengths of the ACU mechanism.

Coming now to the specifics of settlement trends under ACU, I am impressed to note that the overall ACU transaction volumes increased 32.4 percent y-o-y in 2008, and that transactions of Bangladesh with other ACU members increased 60 percent y-o-y FY 08; both much higher than the global trade growth rate stymied in the recent past by freeze-ups in trade finance availability in many major markets in turmoil. The ACU member central banks standing behind their commercial banks in each and every intraregional trade settlement under ACU eliminate settlements risks, with no need for expensive credit confirmation lines from international banks. A member central bank in temporary liquidity difficulty can in turn access swap facility extended by other ACU members. Crisis situations like the current financial turmoil bring out in clear outlines such strengths of multilateral arrangements that may seem mundane or of little relevance in normal times.

It may be worthwhile to examine the feasibility of extending the ACU mechanism to include medium and longer term payment settlements of intraregional trade in capital goods.

The current ACU settlement arrangement with bimonthly settlement cycle is not designed to accommodate medium and long term payment settlements of trade in capital goods, for which the suppliers'/buyers' credit lines in the international market charge hefty country risk premiums of a few hundreds of basis points. An extension of the current ACU arrangement with the member central banks standing behind the medium and long term payment settlements for inter-regional trade in capital goods could be of substantial benefit, both for the exporting and the importing member countries. I would like to conclude here with thanks, looking forward to hearing on this from other learned directors more familiar with the current ACU procedures.


The Role of Monetary, Fiscal and External Debt Policies*

I am very happy to be invited to give a keynote address in the opening session of this regional workshop for sharing experiences and ideas on how we have responded to the global financial crisis and how countries in our region can bolster defenses and responses against such crisis in future, individually and collectively. I am grateful to the ESCAP for inviting Bangladesh Bank to host this important workshop for finance ministry and central bank officials from developing economies in the Asia Pacific region. I am also grateful to our honorable Minister for Finance for gracing this opening session with his august presence.

As we all know, the global financial crisis originated far away from us geographically; banks in the Asia Pacific region did not indulge in sub-prime lending or the other lax, dubious practices that triggered the crisis in financial institutions and markets in North America and Europe. Fallouts of the crisis were quick to reach our shores as well pretty fast mostly through the trade and financial channels in the present day integrated global economy.

In the trade channel, demand weakness in North America and Europe caused by chains of insolvencies and wide-scale job losses sharply weakened exports from the manufacturing hubs in our region. Intraregional exports declined nearly as fast, these mainly being primary and intermediate inputs consigned to the regional manufacturing hubs for onward export of final output to the North American and European markets. Tourist destinations in our region faced declining tourist arrival; migrant workers from the region faced pay cuts and job losses in host markets in recession, affecting remittance inflows to their dependents at home.

In the financial channel, our region faced substantial net withdrawal of financial investments from the North American and European economies in crisis, availability of fresh inflows also narrowed sharply. Investments of the huge foreign exchange reserves and sovereign wealth funds of our region in markets in North America and Europe incurred substantial losses in bond defaults, collapsed

*'Strengthening the Response to the Global Financial Crisis in Asia- Pacific:The Role of Monetary, Fiscal and External Debt Policies' organized by ESCAP on 27 July 2009.


values of equity and complex derivative assets, and exchange rate risks. These financial channel impacts triggered stock price slump and liquidity crunch in markets in our region, particularly in economies facing heavy withdrawals of foreign financial investments. These adversities roughly mirror those in the North American and European economies where the global crisis originated, but the distresses by way of corporate and1 The keynote speech was delivered by Dr. Atiur Rahman, Governor of Bangladesh Bank in the inaugural session of ESCAP-Bangladesh Bank Workshop on the captioned subject during 27-30 July 2009 in Dhaka personal insolvencies in our region were less severe, partly because of timely and appropriate intervention by fiscal and monetary authorities, but perhaps mainly because of much lower levels of indebtedness and higher reliance on equity and savings ingrained in the general cultural attitude of our region. We would be well advised to preserve this positive cultural trait while charting the future paths for our real and financial economies.

To sustain economic activities and growth under the shadow of the global financial crisis and recession, countries in our region have acted counter-cyclically to prop up domestic demand, with increased public expenditure towards subsistence safety nets and alternative employment for vulnerable population segments including those losing jobs in the affected export sectors. This has meant increased public debt, raising tax rates not being much of an option in economies facing slowdown. Increased government borrowing at non-concessional market rates increase concern about debt sustainability; demanding well designed debt management strategies for the existing and likely future growth path of domestic and external public debt.

To maintain adequate liquidity and credit flow in the markets, central banks in our region have lowered policy interest rates; and have relaxed conditions for borrowing by banks from the central bank, widening the range of financial assets admissible as collaterals. Some central banks like Bangladesh Bank have also provided special refinance windows for banks against their lending in priority economic sectors (e.g. agriculture, SMEs); and all central banks in the region are shoring up regulatory oversight on liquidity, solvency and capital adequacy of banks and financial institutions to limit or prevent contagion from the current or future episodes of financial turmoil, regional or global. The stimulatory measures adopted by governments and central banks to support domestic demand and economic activity will need to be phased off carefully as the global economic recovery takes hold, to avoid buildup of inflationary pressures and macroeconomic imbalance in lax monetary conditions.

Different countries in the Asia Pacific region have been impacted by the global financial crisis by varying degrees, depending on the structures and extents of external openness of their economies. Bangladesh has been impacted relatively lightly because of her limited, regulated openness, particularly to short term capital flows. The financial sector in Bangladesh remains free of the toxic assets and contagion from the external turmoil, and liquidity conditions remain normal. The competitiveness of our apparels exports, particularly at the lower end, have retained overall export growth rate at double digit levels; workers' remittance inflows have grown strongly; and the economy has registered 5.9 percent real GDP growth in FY 09 with single digit inflation. Nevertheless, to cope


effectively with likely prolonging of the global downturn, the government and Bangladesh Bank have adopted fiscal and monetary measures underpinning domestic demand and maintaining easy credit conditions, like other countries in the region.

I see several areas where regional and global cooperation can strengthen and supplement the individual country responses to the current and possible future global financial crises. Firstly, our intraregional exports need to grow faster, not just in primary or intermediate inputs but also in finished consumer and capital goods, to reduce dependence on North American and European markets where debt driven demand may be slower to recover to previous levels as corporates and households continue deleveraging.

Secondly, the governments and central banks in the Asia Pacific region may foster accelerated development of regional bond markets to channel regional savings into real sector investments within the region rather than investing the savings in opaque, complex financial assets of dubious quality in the western financial markets. The swap arrangements between regional central banks for mutual support at times of pressure have lots of room for extension.

Thirdly, regional dialogues may urge the more affluent emerging economies to broaden windows of concessional lending to governments of lower income economies, to help protect their debt sustainability. Regional intergovernmental dialogues need to discuss positive and negative externalities of domestic policies of the larger economies, to minimize the negative spillovers and to strengthen the benign ones.

Lastly, in dialogues in UN, IMF, WB and other global forums, countries in the Asia Pacific region need to present a unified front favoring a new global financial architecture that ensures global financial and economic stability by tethering global financial growth in some suitable mechanism to the trend of growth in real global output; with effective grasp on global liquidity growth to inhibit speculative bubbles and roller coaster swings in markets.

I believe the workshop sessions guided by the learned staff members and resource persons from ESCAP secretariat will bring up useful ideas and suggestions on the issues mentioned here; and I would like to conclude with thanks for your patient attention, wishing the best success for this joint initiative of the ESCAP and Bangladesh Bank.


Global Banking: Paradigm Shift*

Shortcomings in financial system regulation and supervision regimes are now under intense scrutiny everywhere, following the global financial turmoil that exacted heavy tolls in wealth destruction and recession, with particular severity in the mature advanced economies. Ironically, it was the placid stability of the preceding several years that lulled institutions, markets and regulators into complacency and inaction about the mounting global imbalances and the inordinate risk build-ups in the financial system eventually precipitating institutional failures, market freeze-ups and severe credit crunch. The gross disregard of basic cautions in risk-taking in large globally active financial institutions was prompted by quest of quick private gains for small inner circles in top managements and boards, imperiling longer term viability of the institutions and hurting interests of general shareholders and of broader citizenry as stakeholders in the financial system.

Revised regulatory and supervisory regimes are now being crafted for the financial systems bailed out with massive fiscal and monetary interventions, and we may expect the global economy to be back on path of sustained stable growth over the near term. Memories of crisis are quickly forgotten in better times, when words of caution and prudence tend to be taken lightly. Unless the motivations driving the top managements and boards of financial institutions are realigned appropriately towards longer term collective gains for shareholders and for communities they work in, it will be unsurprising to see another global crisis emerging after a spell of years in sustained stablegrowth. We shall be well advised to bear this in mind while refashioning the financial sector regulatory and supervisory regimes in our part of the world.

Because of the limited regulated external openness of the economy, the financial sector in Bangladesh suffered no contagion from the global financial turmoil. Rather than being afflicted by credit crunch, domestic markets remain awash with liquidity from BOP current account surpluses, FY O9 growth in inflows of workers' remittances (22.4 percent) and export receipts (10.1 percent) were well in excess of the tepid 4.6 percent growth in import payments. Apart from a net FDI outflow of USD 159 million in FY 09 there has been no additional outflow

International conference on 'Global Banking: Paradigm Shift', held in Mumbai, India, 8 September 2009.


pressure attributable to the global crisis, as resident corporate have no short term external borrowing exposure other than normal trade credit.

Regulatory/supervisory reforms in Bangladesh - brief recap: Ongoing reforms in financial sector regulation and supervision in Bangladesh, proceeding along the pre-global crisis sequence, aim at eventual full convergence with global best practice standards set by the Basel Committee for effective Bank Supervision (BCBS). Post-crisis modifications in BCBS standards will be considered for adoption in Bangladesh after these are firmed up.

The post-liberation wholly nationalized financial sector in Bangladesh, beginning with directed lending at administratively prescribed interest rates, underwent the following sequence of basic changes in policy regime:

a) Licensing of private sector banks, introduction of asset classification and provisioning requirements, in the 1980s;

b) Discontinuance of directed lending, freeing up of interest rates, introduction of (Basel-I) capital adequacy regime based on risk weighted assets; in the 1990s, and

c) Introduction of market based exchange rate regime for Taka, the domestic currency, from May 2003.

These transition steps to a market-based financial sector were accompanied by roll out of prudential supervisory regulations along lines of BCBS standards, covering interalia the following:

i) Financial statements and disclosures in conformity with internationally accepted accounting standards;

ii) Good corporate governance; with fit and proper tests for directors and chief executives, clear delineation of roles, responsibilities and accountabilities for directors and chief executives, prior central bank clearance for appointments, removals and compensation structures for chief executives. In the recent past, the large four state-owned commercial banks have been converted into public limited companies ('corporatized'), putting them in readiness for eventual partial or total privatization.

iii) Sound risk management practices meeting the minimum standards set in guidelines for management of core risks issued by BB, now in the process of further revision.

iv) Limits on large exposures to single borrowers, limits and disclosure requirements on loans and other facilities to directors, members of senior management and their connected interests.

v) Internal control and compliance units reporting to Audit Committees of boards, annual external audits besides continuous on- and off-site BB supervision.

vi) From 2009 onwards banks are to work out their capital requirements according to Basel II capital regime, alongside continuing compliance with the current 'Basel-I minimum plus two percent' capital requirement on risk weighted assets.


Regulatory and supervisory capacities in BB are being continually upgraded. Current supervision routines include supervisory CAMELS ratings of banks based on a set of performance indicators, early warning to banks with deteriorating trends in performance indicators, intensive oversight on problem banks with CAMELS rating below a specified minimum. Recently, steps have been initiated to build up an adequate pool of stress testing capabilities, towards introduction of stress testing routines for identifying institutional and systemic vulnerabilities in probable stress events. In view of recent trend of increasing engagement of commercial banks in capital market activities, oversight on their regulatory compliance this area has been intensified. BB has engaged banks in major programs of upgrading their IT platforms with ample processing powers and online connectivity; to enable efficient data management, processing and analysis in banks for own risk management purposes and for reporting to BB. The IT platform in BB is also undergoing similar upgradation, to enable timely and adequate supervisory analyses of various data received from banks.

Fostering engagement of the financial sector in the under-served priority areas, towards broader socio-economic benefits: Besides regulation and supervision with usual focus on financial outcomes, Bangladesh Bank (BB) remains active in promoting and supporting deeper engagement of the financial sector in the under-served priority areas like agriculture, SMEs, low cost housing, renewable energy and environmental sustainability (solar/ biogas/ effluent treatment plants); in comprehensive programs with access to refinance support in case of need. Financial returns for the lenders in these engagements may often be below par (outright losses should be unlikely, given availability of reasonably priced refinance), but the below par returns will be defensible on grounds of broader socio-economic benefits (by way of increase in employment, output and income for those involved in the activities financed). Well supervised healthy financial sectors using part of their resources in investments fetching below par financial returns but generating broader socio-economic benefits will be more focused on longer term viability and growth, better protecting stability than financial institutions obsessed with maximizing quick short term gains from risky speculative investments.

Addressing issues in financial sector regulatory/supervisory regimes and in global financial architecture brought to surface by the global financial turmoil: The difficulties with and inadequacies of the current financial sector regulation and supervision regimes highlighted in market freeze-ups during the global crisis (like the procyclicality of capital and provisioning requirements, unworkability of marking to market valuation of trading book assets in situations of market collapse/ extreme market stress, institution specific rather than system-wide focus of supervision, permissiveness of inordinate buildup of risks and leveraging) are now under active remedial consultations in global expert forums.

Smaller developing economies should have opportunity for representation in these global consultations to voice their needs and concerns. Global dialogues for a new global financial architecture need also to start in right earnest; with coordinated voice of smaller economies for safeguards against buildup of global imbalances from negative spillovers of lax unbalanced policies of dominant economies. The new arrangements will also need some mechanism tethering


global liquidity growth to the actual or potential rate of global growth in real sector output; to avoid overblown global liquidity fuelling speculation and asset price bubbles leading to a possible rerun of the crisis that the world is still busy coming to grips with.

Financial Integration in South Asia- a few thoughts on how best to go about it

People feel more attracted to ideas of regional cooperation and integration in unstable crisis situations (like the still lingering global financial turmoil) than in periods of stable serenity. Like larger ships in turbulent seas, regional economic unions and regional currencies are likely to fare better than individual economies (particularly smaller ones) and their currencies in turbulent, volatile global economic situations.

European Union (EU) is the most conspicuous success story thus far in regional integration, with the Euro adopted by all but a few of the EU members as their common currency. While occasional voices of discontent are heard in EU member countries about ceding of decision making to remote supranational bureaucracies, no member has ever walked out of EU, and the queue of countries awaiting full membership is quite long.

Let's take a look at the present status of integration initiatives in South Asia. In our region, the South Asian Association for Regional Cooperation (SAARC) comprising Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka is mandated for broad based cooperation in social and economic development. Under its aegis the South Asian Free Trade Area (SAFTA) is working for promotion of intraregional trade, and the SAARC Development Fund (SDF) has a USD 300 million regional investment program with three windows: i) a 'Social window' for poverty alleviation and social development projects, ii) an 'Infrastructure window' for projects in energy, transportation, telecommunications, environment, tourism etc., and iii) an 'Economic window' for other projects.

The SAARC has not as yet explicitly declared total financial and monetary integration as ultimate cooperation goal. Protracted SAFTA negotiations for lowering tariff and non-tariff barriers to trade have been beset with complications of existence of input and output subsidies on many produces, and with concerns of producers in negotiating countries about preserving their current and future market shares. There has been no announced strategy statement of SAFTA for systematically allaying these concerns; say, with priority for exploiting complementarities in mutual enhancement of competitiveness of members in intraregional exports as well as in exports to the rest of the world. In absence of a clear strategy statement for the opening up processes, negotiators tended to remain stuck to overcautious positions with long negative and sensitive lists.

Conceived in 2005 as reconstitution of the earlier South Asia Development Fund (SADF), the SDF is yet to complete its formative phase, there has so far been no investment in any actual project from the SDF or the erstwhile SADF.

The Asian Clearing Union (ACU) with Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka as members is another regional forum conducting multilateral settlements of intraregional trade


transactions. Annual ACU board meetings mull over the state of cooperation and intraregional trade, but the ACU is not mandated to undertake any specific new program for deepening cooperation towards a monetary union.

What are the Dos and Don'ts on the path towards South Asian financial and monetary integration? Integration of intraregional trade with harmonization of tariffs is the first phase in integration providing the base for financial integration, the next phase with freed up factor (capital, labor) movements; this in turn providing the base for monetary union, the final phase with some degree of fiscal integration (fiscal transfers to worse-off member economies from fund pool contributed by better-off members), and some extent of political integration in terms of social policies as well.

The EU example shows how truly remarkable the gains from full integration can be; nations with history of being at each other's throat in hostility for centuries and triggering two world wars are united in harmonized laws and regulations for socio-political and economic life, making new armed conflicts between regional members look very unlikely. The disputes and differences between South Asian neighbors look minor and insignificant seen against past hostilities between major EU members. Resolute, meaningful steps towards an explicitly announced goal of full monetary union in South Asia over the medium to longer term would facilitate ironing out of these relatively minor political disputes and differences, reducing the risks of armed conflicts and channeling resources to combating deprivation and poverty from wasteful expenses on arms buildups.

Alongside the potential large benefits there are also significant costs to be managed with skill and wisdom in the progression path through successive phases of integration; such as the needed adjustments in domestic production structures with shift out of activities rendered unviable by intraregional trade integration (which can be minimized but not altogether avoided), and diminished options for policy intervention at individual member economy level in responding to internal or external shocks. Policies of large member economies in a union typically have substantial negative or positive impact on economies of smaller members; to create and preserve an atmosphere of mutual trust and confidence the larger member economies need to demonstrate sensitivity and gestures of generosity in addressing concerns of smaller members. Because the spillover effects of policies of larger members are higher; their generosity gestures need not necessarily be large in absolute terms.

There is ample scope of substantially scaling up and speeding up the ongoing SAARC initiatives, with an explicitly announced longer term goal of full economic and monetary union. This would be a long haul even in most favorable circumstances; and care will need to be exercised, especially by the larger members, not to impede progress in integration with unhelpful policy stepsguided by other concerns. Erecting barbed wire fencing along state borders with neighbors does not resonate well with integration priorities; there can be other feasible options for dealing with illegal movement of goods and people (harmonization of tariffs towards cross border price parity, permitting limited border trade, streamlining of immigration procedures and so forth). Looking for transit facilities through smaller members to remoter regions of larger economies


instead of further facilitating trade of these remoter regions with neighboring smaller economies may likewise raise concerns unhelpful in promoting integration.

Regional central banks in their deliberations in ACU and other forums are active in carrying forward regional cooperation and integration in various dimensions; non-governmental people to people contact and consultation forums (like the present session organized by FICCI) can likewise be active in explicitly articulating the longer term aspirations for full regional integration for faster progress towards prosperity of people of our region.


Global Financial Recession*

The world economy has changed spectacularly since September 2008. A year has passed since the collapse of Lehman Brothers-a watershed event for the world economy. The recession in many of the major industrial economies has already set several records. In the case of the US, this recession is the longest since the Great Depression. The financial sector in the US, UK, and some euro zone countries remains fragile as many banks retain loan portfolios tainted with nonperforming assets-including toxic residential and commercial mortgage-backed securities.

Shortcomings in financial system regulation and supervision regimes are now under intense scrutiny everywhere. Authorities across the world responded quickly and decisively to the threat of a potential replay of the Great Depression including steps to shore up the stumbling international financial system and restore confidence, opening wide the taps on money supply, boosting public spending plans and so on. Central banks and governments around the world have taken timely policy actions to prevent a complete collapse of the financial system and to provide stimulus to demand.

Impact on Developing Countries

Developing countries-at first sheltered from the worst elements of the turmoil-are now much more vulnerable, with dwindling capital flows, huge withdrawals of capital leading to losses in equity markets, and skyrocketing interest rates. The crisis presents developing Asia with its most difficult economic challenges in recent times. Overall growth in developing Asia tumbled from its impressive peak of 9.5% in 2007 to 6.3% in 2008 and is further expected to decline in 2009 (ADB forecasts at 3.4% in 2009). However, Bangladesh, Brazil, China and India have achieved positive growth in the face of the meltdown.

The longer or deeper the crisis becomes, the greater the risks to the region's financial sector. A delayed or disorderly resolution of the credit crisis in the developed countries could undermine financial stability in developing Asia by further shaking investor confidence in financial systems and instruments. Already the region is experiencing:

*Seminar on 'Global Financial Recession', organized by Daffodil International University, 24 October 2009.


J Radical cut back in external financing, a key driver of economic expansion;

J Decline or slower growth in remittances which are damaging economies dependent on their overseas workers;

J Slowing economic growth destroying jobs and driving down wages, consumption, and welfare of the developing countries. The International Labour Organization (ILO) has warned that this recession may add more than 30 million people to the rolls of the unemployed by the end of 2009.

J Women workers are likely to suffer the most as the crisis decimates their jobs and makes them more vulnerable.

Impact on Bangladesh

Financial markets and institutions in Bangladesh remained free of the toxic assets and contagion afflicting the global financial markets over the past couple of years, because of the limited, regulated exposure to the global economy.

J Economic growth in Bangladesh has thus far been only mildly impacted by the ongoing global slowdown, attaining 5.9 percent real GDP growth in FY 09 following the 6.2 percent growth in FY 08. This year growth rate is expected to cross 6 percent.

J FY O9 growth in inflows of workers' remittances (22.4 percent) and export receipts (10.1 percent) were well in excess of the tepid 4.6 percent growth in import payments. Foreign exchange reserve is more than USD 9.5 billion and likely to touch USD 10 billion in the year end.

J Apart from a net FDI outflow of USD 159 million in FY 09 there has been no additional outflow pressure attributable to the global crisis. BB's response to Global Financial Crisis:

J Regulatory and supervisory capacities in Bangladesh Bank (BB) are being continually upgraded. Current supervision routines include supervisory CAMELS ratings of banks based on a set of performance indicators, early warning to banks with deteriorating trends in performance indicators, intensive over sight on problem banks with CAMELS rating below a specified minimum.

J Recently, steps have been initiated to build up an adequate pool of stress testing capabilities, towards introduction of stress testing routines for identifying institutional and systemic vulnerabilities in probable stress events.

J BB has engaged banks in major programs of upgrading their IT platforms with ample processing powers and online connectivity; to enable efficient data management, processing and analysis in banks for own risk management purposes and for reporting to BB.

J Bangladesh Bank has increased the target for agriculture credit by 22.7 percent this year (FY 2009-10) compared to that of the last year. BB remains active in promoting and supporting deeper engagement of the financial sector in the under-served priority areas like agriculture, SMEs, low cost housing, renewable energy and environmental sustainability (solar / biogas / effluent treatment plants), in comprehensive programs with access to


refinance support in case of need.

J A Taka 2.0 billion refinance line has been introduced in FY 10 against bank loans for environment friendly investments in solar energy, biogas plants and effluent treatment plants. In FY 10 BB has also introduced a first ever Taka 5.00 billion refinancing line against loans to landless sharecroppers in a group-based special program designed by a major MFI, BRAC. Further, BB has been urging banks and financial institutions to embrace specific commitment to financial inclusion as a Corporate Social Responsibility (CSR) obligation.

J The banking sector is currently witnessing a liquidity glut of about Tk. 38,000 crore, up from Tk. 35,000 crore in June 2009. To mop up excess liquidity, BB has reduced repo and reverse repo rate to 4.5% and 2.5% from 8.5% and 6.5% respectively.

In conclusion, the crisis provides an opportunity to undertake difficult, long-term policy reforms that often may not have been feasible during normal times. The crisis has an important human dimension. Undertaking actions to mitigate the social impact of the crisis and protect investments in human capital is critically important. These measures can help obtain broader support for reforms and can also ensure early recovery and long-term growth.

Finally, regional cooperation, sharing of information and lessons, and coordinated surveillance are key elements in an effective response to the crisis. No single country can manage the crisis on its own. Global dialogues for a new global financial architecture need also to start in right earnest; with coordinated voice of smaller economies for safeguards against buildup of global imbalances from negative spillovers of lax unbalanced policies of dominant economies.


Ensuring Food Security: the Role of SAARC Central Banks*

We are gathered here to discuss ways in which we SAARC central bankers can contribute further to ensure food security for our population, and the ways we can cooperate regionally in this effort. We expect from our discussions to come up with some policy and cooperation suggestions for consideration in the next SAARC summit meeting.

We have chosen food security as the discussion subject because progress of South Asia in this front is markedly slower than the widely acknowledged trends of good progress in output growth, stability and resilience in coping with shocks like the recent global financial turmoil and economic slowdown. The October 2009 Global Hunger Index reports 'distressingly high' hunger index levels for South Asia, with 'alarming' vulnerability ranking for the three populous countries India, Pakistan and Bangladesh; and one notch better but still worrisome 'serious' vulnerability ranking for Sri Lanka and Nepal. Climate change, protracted internal conflicts, speculation-fuelled global commodity price spikes as seen in 2008 are risk factors further clouding the food security outlook for around a fifth of the South Asian population still in extreme poverty and chronic hunger. A renewed vow of concerted thrust for eradication of extreme poverty and chronic hunger is called for; and I am deeply grateful to our honorable Ministers for Finance and Food for the grace of their august presence in the opening session to inspire us in this vow.

The nexus between food security and the usual core concerns of central banks may not be immediately obvious at first glance; but with a closer look it is easy to see that many of the key prerequisites for food security are also the conditions in the economic environment that central banking per se seek to foster.

Firstly, central banks in developing regions like South Asia seek to foster, with supportive monetary policies, stable economic growth at sustained high rates. The growth thus generated strengthens food security, both in terms of availability (augmenting resources for locally producing or importing food supplies in needed volumes) and in terms of access or affordability (augmenting income of

*Symposium on 'Ensuring Food Security: the Role of SAARC Central Banks', 26 October 2009.


consumers to buy food with). Foreign exchange reserve accretion objective pursued by central banks likewise strengthens food security, increase in reserves augmenting wherewithal for food imports if needed; the inflation objectives pursued by central banks (containing inflation at moderate, stable levels) help protect affordability of food supplies for consumers, particularly those with lower incomes.

Secondly, central bank refinance supported credit programs for bridging market failures and gaps in financing agricultural production and SME / self-employment initiatives directly contribute to food security; by helping increase domestic output of food crops, and by making food supplies more affordable with the increased income of borrowers participating in these programs. In Bangladesh, comprehensive annual credit programs with adequate central bank refinance lines support local production of diverse range of food crops; lending to sharecroppers owning little or no holding of farmland is a recently added new dimension in the agricultural credit program.

More generally, all central bank initiatives promoting fuller financial inclusion of the weaker, spatially or otherwise more isolated population segments improve food security by improving access / affordability. Financial service providers reaching out to the hitherto excluded population groups help them increase their income from agriculture, SME or other income generating pursuits that they engage in. Even those unable to engage in income generating pursuits because of old age or disabilities benefit from financial inclusion by way of greater ease and lower costs in drawing social safety net payments from relevant government agencies. New delivery arrangements developed in creative partnership of banks/microfinance institutions (MFIs) with mobile phone / IT platforms are being encouraged, to enable swift low-cost remote delivery of financial services to the rural poor, boosting their financial inclusion and consequent access to food.

Small sized loans from MFIs for income generating self employment pursuits are improving access of rural poor to food, with financial inclusion enhancing their income. Being licensed and supervised by a Micro-credit Regulatory Authority (MRA) chaired by the central bank Governor gives a huge boost to confidence in these MFIs.

Alongside the more conventional engagements of central banks mentioned earlier, financial inclusion may thus merit ranking high in the food security promotion agenda of central bank, unlocking for the newly included population groups the conveniences and opportunities from financial services that we take for ourselves as granted.

Over the longer term, the ad-hoc special programs for bridging market failures and gaps in financial services need to be replaced by market-based arrangements that remove the disincentives deterring spontaneous engagement of lenders in financing the activities supported by the special programs. Well functioning institutional arrangements of crop insurance against output risks and price risks in agriculture, and repayment guarantees for part or whole of SME loans have been instrumental in many countries (including developed ones) in mitigating loan default risks faced by agricultural and SME lenders. Such


arrangements usually require some extent of subsidy support from government, at least in the early stages. Putting in place institutional arrangements for crop insurance and SME loan guarantees are likely areas for exchange of experience and cooperation among SAARC central banks.

Importation, warehousing and trade in food grains in Bangladesh are financed spontaneously by banks on normal commercial terms; but the periods for which food-crop warehousing are financed become loaded issues, particularly at times of price pressures. The debate over whether promotion of futures markets in food grains will smoothen or exacerbate food price volatility remains unsettled; SAARC central banks may consider cooperating in a region-wide study on this question.

Connections of central banks are remoter with other important aspects of food security like balanced nutritional content of usual dietary intakes; development of diverse new crop varieties capable of withstanding diverse climatic conditions such as drought, flooding, salinity; buffer stocks of major food crops; preparedness for urgent transportation and distribution of food supplies to people affected in natural disasters.

The factors impacting food security in different countries of South Asia are interesting in their diversity. Bangladesh is not far off from self-sufficiency in domestic production of the staple food grains, importing only about five percent of total requirement in normal years. The larger countries India, Pakistan, Bangladesh, Nepal are focusing more on bolstering domestic output of food crop, dairy and fishery products in view of uncertainties in sourcing imports. Maldives, a small country, has very limited room for expanding domestic food crop output and will of necessity rely more on affording imported supplies. Low altitude Maldives and Bangladesh are particularly in threat from rise of sea levels, other South Asian countries are less so. Some South Asian states have experienced localized worsening of food security in conflict driven population displacements; food security in Bangladesh has not been affected by such conflicts but instead by periodic spells of natural disasters. Reaching out to the remoter, more isolated population segments with reliable chain of regular food supply is relatively less of a challenge for Bangladesh than for larger South Asian neighbors with greater geographic sprawl.


Global Financial Meltdown and International Trade Finance*

Global financial crisis started in July 2007, deepened with a collapse in global trade and finance at the end of 2008. Bangladesh weathered the crisis so far, because of smaller exposure to international trade, credible monetary policy; timely announcement of stimulus package; banking and foreign exchange policy changes in favour of trade finance and so on.

However, fragile demand situation in USA and European countries, particularly for RMG, frozen food, leather etc. has been pushing a downward pressure (a somewhat belated pass through) on our export during July-September 09 (Q1 FY10); expected to rebound by the continuing gains in global demand recovery.

A recent survey on trade finance, conducted by the Department of Off-site Supervision (DOS) of Bangladesh Bank finds many instances, where export orders (export L/Cs) started to increase gradually. In fact, cost of production is lower in Bangladesh than in China and India, which has resulted in increased orders from the West.

Import payment remained low because of overall lower cost of imports and reduced import of food grain (since good domestic harvest) and capital machinery (due to excess capacity, no expansion or new investment). However, increased L/C openingin recent months signals the pace of output activities in near future.

Unlike recession ridden advanced countries, finance has not dried up here rather we have excess liquidity in the banking sector, which has started to decline gradually; appears appropriate with the highest foreign exchange reserve of USD 10 billion and tolerable inflation rate of 4.69 percent (point to point, as of August 09), and also necessary in keeping the economy on course of the targeted six percent real GDP growth in FY 10.

In the backdrop of global economic downturn, Bangladesh Bank continues to keep credit conditions easy; high emphasis on channelling the liquidity into productive and supply augmenting investments including mandatory agricultural

*'Global Financial Meltdown and International Trade Finance', 17 November 2009.


and SME activities; expected to lead to more broad-based and inclusive growth processes, while discouraging excessive consumer credit and similar demand-side lending to avoid build up of inflationary pressures. BB is giving approval for SME and rural (agricultural) bank branches on priority basis.

Bangladesh Bank has opened refinance windows for share croppers (collateral free loan), SME, Solar Energy, Bio-gas and Effluent Treatment Plant (ETP) under its (BB) newly introduced 'Green Banking' program with a view to ensure environment friendly and diversified investment portfolio in the banking sector.

A wide range of measures has already been adopted to keep the economy safe from the contagion effects of global meltdown, international trade - in particular:

J Export subsidy/cash incentive has been enhanced for affected industries; frozen food, Jute and leather products (shipped April-June 09). Besides, plastic and finished leather products are included in addition to the existing 13 categories of export subsidies.

J 70 percent of the export subsidy/cash incentive may be released before audit formalities, and remaining 30 percent shall be payable after completion of audit.

J Limit of advance payment from Exporters' Retention Quota (ERQ) has been enhanced to USD 10,000 from USD 5,000 for emergency import payment.

J Relaxation of loan rescheduling conditions, waiving down payment requirements (up to Sept 30, 2009) for recession-hit export oriented industries (depending on banker-customer relationship), especially frozen food, leather and leather products, jute and jute goods, textiles (including spinning) and RMG.

J Regulations for undertaking forward transaction of foreign exchange have been liberalized to reduce the foreign exchange risk in international trade.

J The limit for borrowing (single borrower) from Export Development Fund (EDF) has been increased to USD 2.0 million from USD 1.5 million for importing raw materials (Back to Back L/C) against export L/C.

J Interest rate cut in lending, prescribing ceiling of maximum 13 percent in financing trade, agriculture, large and medium scale industries, term and working capital and housing.

J Fiscal stimulus for Tk. 4.50 billion to support recession-hit export sectors: Jute, Leather and Frozen food.

J Rationalization of service charges of banks and financial institutions.

J Introduction of 'E-commerce' operation in the banking sector; accelerated banking and business transactions, electronic fund transfer etc.

J Mobile Phone banking, on-line CIB report and Automated Cheque Processing System will help bringing dynamism in trade and business.

J Steps have been taken to obtain Sovereign Credit Rating for Bangladesh to


facilitate borrowing abroad by private sector industrial enterprises, and confirmation of credit lines on more favourable terms. Sovereign Rating is expected to reduce cost of trade finance with low-cost fund/loans (since low country risk premiums charged) and least credit confirmation lines. Indeed, the high reserve position (over USD 10 billion) will be a vital parameter to get a better sovereign rating.

Global economic condition is expected to improve in 2010; still uncertainty exists and a further rebound of adverse effects remains possible. Our main challenge is to stall the declining trend of export; diversify products (shipbuilding, IT sector, for example) in line with the growing demand of the advanced countries; looking for new markets in fast growing economies in Europe, Asia and South America.


Vision of Integration and Development in South Asia -some Key Issues and Considerations*

Based on experiences elsewhere, it is widely believed that closer integration with higher intraregional trade and investment will help hastening development and poverty reduction in South Asia, besides reducing vulnerability of the region to external shocks. Gains from integration arise from optimal utilization of comparative advantages in the region, with higher scale economies for efficient entities producing for the broadened regional market. Although expected to be outweighed by future gains, the immediate adjustment costs of integration for member economies can be substantial; less efficient producers are forced to adapt to the changed market realities or to shift to altogether different business lines, which is why integration processes are seldom very quick or frictionless and require sustained care and commitment, backed by necessary resource support.

Once successfully kicked off, progress in regional integration can however be largely self sustaining, the uniting influences of cumulating gains from growing integration overriding the disuniting influences of differences or disputes between regional countries in political or other arena.

Because global trade has already progressed far in openness, initial gains from steps for closer South Asian integration are likely to be modest rather than spectacular. To avoid eventual disillusionment, the goals for and expectations of likely gains will need to be realistic. Full openness in trade and in factor (capital, labor) movements will need to be preceded or accompanied by full harmonization of tariffs, input and output subsidies, and labor market policies; and can therefore only be medium term goals. Successful completion of this phase, attended by closer integration of fiscal policies will pave the way for the final phase of monetary union with a supranational regional currency, like the Euro of the European Monetary Union.

To help build and strengthen consensus for the integration goals and efforts, besides the necessary medium and longer term initiatives it will be advisable also to initiate some steps yielding modest but highly visible quicker gains in specific areas. These can include, for example, India allowing its remoter Eastern

*The Second South Asia Economic Summit (SAES): Session on the Financial Crisis and South Asian Economic Integration and Development, New Delhi, India, 12 December 2009.


provinces (the 'seven sisters') to trade freely with neighboring South Asian countries. Based on reports from Bangladeshi businesses, trade with these Eastern Indian states still remains beset with numerous non-tariff barriers, despite some recent modest improvements.

Most favored nation treatment to all regional neighbors in trade, and subcontracting or outsourcing to producers in lower cost regional neighbors in manufacturing (say, of machineries requiring fabrication of many components, or complex IT software comprising multiple modules) for exports to destinations outside the region are among other likely areas where it should be possible to reap quick gains from regional integration.

Continuing swelling of foreign exchange reserves of some of the South Asian countries represent investment resources of which a substantial part can be put to good use in addressing the deficiencies in infrastructure that are severely constraining growth efforts. South Asian governments can urgently act together in this area, co-operating and sharing expertise towards best results.

The SAARC forum has thus far been rather lukewarm and half-hearted in regional cooperation efforts, with weak follow up and poor progress in the few announced initiatives (like SAFTA, SDF).

The SAARC can be relaunched as a clearly and unequivocally articulated initiative for regional economic and financial integration, with eventual monetary union as the ultimate long term aim.


World Financial Crisis and Global Business Challenges*

I am happy to be invited to make a keynote speech in the opening session of this seminar on challenges facing businesses in the post-global financial world crisis. The global economy is recovering, supported by government bailouts and stimulus on a truly massive scale, but the effects of the crisis on businesses and other economic activities around the globe will quite probably linger for quite some time to come. While governments and supranational multilateral agencies need to take lessons in bolstering resilience and preventive defenses against future episodes of such crisis; the business community also faces the challenge of learning the right lessons in charting their future path carefully avoiding the extremes of illiquidity and insolvency distresses in possible future financial instability on a global scale.

In looking for lessons from the crisis we may begin with a brief glance at its genesis. The makings of the crisis were in the mounting global imbalances from about two decades of US external current account deficits; dollar's position as the dominant global reserve currency permitting indefinitely long spells of lax macro-economic policies in the US. The export driven Asian growth hubs kept financing the US deficits avidly, piling up mountains of dollar denominated US debt as reserve assets. The two sides occasionally exchanged blames for the global imbalance, citing excessive profligacy of the US and excessive frugality of Asia, with little said or done about putting in place safeguards in the global monetary order against buildup of large imbalances.

The surfeit of global liquidity arising from debt fuelled spending did help growth in real global output, but this contribution to real growth was outpaced by faster growth in financial claims, with credit bubbles created by glut of cheap liquidity leading to price bubbles in asset and commodity markets. The frenetic activities of sub-prime consumer and mortgage lending, reckless corporate leveraging for acquisitions and buyouts, speculative trading in securities and opaque derivatives backed by poor quality assets, futures trading in commodities and financial assets in the markets of mature advanced economies that rendered the entire global financial system fragile to the breaking point are already well

*Keynote speech at the seminar on 'the World Financial Crisis and Global Business Challenges', Senate Bhaban, Dhaka University, 22 December 2009.


documented and need no elaboration here. As the credit and price bubbles collapsed in advanced markets precipitating chains of corporate and household insolvencies on massive scale, the distresses spread fast to reach the shores of our region; in lost export orders, failed businesses and lost jobs, plummeting tourist arrivals, return of emigrant workers retrenched in host markets abroad.

The global community has been quick in mobilizing coordinated near term responses to the fallouts from the global crisis, organizing massive rescue packages for bailing out failing institutions and markets, and massive stimulus packages to uphold economic activities and domestic demand in individual economies. The robust coordinated near term responses appear to have already averted a feared prolonged global economic downturn; although there are still lingering concerns about the robustness of recovery of some of the troubled large financial institutions, and business activities in general are still well short of fully regaining their pre-crisis growth momentum.

The crisis did not impact Bangladesh economy severely because of its limited, regulated openness to short term external capital flows. Despite some demand weakening in markets abroad, exports held on to double digit growth rate in FY 09, with real GDP growth slowing modestly to 5.9 percent against 6.2 percent of FY 08. Remittance inflows from migrant Bangladeshi workers continued on uptrend. Uncertainties associated with the global slowdown weakened new investment activities however, with decline in capital goods imports. Low outflows for imports from the growing export receipts and workers' remittance inflows kept local financial markets awash with liquidity. Bangladesh government made ample allocations in the FY 09 and FY 10 national budgets to uphold domestic demand by expanding the social safety-net for the weak and vulnerable population segments, and to provide temporary support to economic sectors hurt in the global crisis. Exports facing demand decline and/or price decline in markets abroad were extended cash incentives at different rates out of allocations from the national budget (a newincentive is under consideration for apparels exports to new markets, for five years, starting at five percent of export value and diminishing by 1% each year). Bangladesh Bank (BB) on its part has maintained easy monetary conditions to facilitate investment activities, allowed banks to reschedule nonperforming export loans temporarily on more lenient terms, widened its foreign exchange lending window (the Export Development Fund) to banks for financing input imports of exporters, and has also launched elaborate refinance support networks for promoting bank lending to under-served sectors of productive economic activities including agriculture, SMEs, sustainability / renewable energy related projects. Broad-based, inclusive, socially and environmentally responsible economic growth is viewed by Bangladesh Bank as the way forward in strengthening domestic demand with rapid reduction of poverty. Following some sluggishness in Q4 FY 09 and Q1 FY 10, available data indicate that from Q2 FY10 output and investment activities in Bangladesh are regaining momentum. Subject to global recovery not losing pace, the 5.9 percent FY 09 real GDP growth is expected to be exceeded or at least matched in FY 10.

In gradually phasing out emergency stimulus packages adopted at the height of the crisis, in this region these will need to be substituted by longer term policy


initiatives towards sustained, continuing growth in domestic demand and intraregional trade. Global consultations are ongoing on the longer term issues including the needed reforms in financial sector regulatory and compensation regimes, accounting standards, leveraging norms and tax treatments of debt finance and equity; serious dialogue is however still to begin about putting in place safeguards in the global monetary order against buildup of large imbalances thatwere the root of the crisis.

Promoting intraregional trade and investment: The export led growth strategies of our region are often blamed by the West, for the regional economies consuming too little of what their growth hubs produce. Although poverty and low purchasing power of broad masses of the population is the main factor holding down

demand, there are also numerous large enough customer bases of more affluent consumers in our region that businesses can better cater to; and the quest for environment friendly options of energy generation and use is opening up vast new markets in the region for the appropriate new capital goods and durables for industries and households. With alertness of businesses in taking advantage of these opportunities, the resulting increase in intraregional trade will compensate for the lingering demand weaknesses in mature markets in the West.

Instead of being proactive in channeling the mounting regional reserves in physical infrastructure and real sector investments in the region, financial institutions and markets in our region have largely been passively passing on regional surpluses to markets in the West, in the run up to the crisis fuelling further the bubbles from speculative financial wizardries. Banks and financial institutions in our region now face the challenge of swiftly developing modalities of channeling the region's savings into infrastructure and other real sector investments in the region, with appropriate product and market structures in debt and equity taking lessons from these activities in the Western markets.

Just as there are important lessons from the West to embrace and emulate, there are also some important lessons in what to avoid and keep distance from.

In the recent crisis, excessive dependence on debt deepened distresses for businesses in the Western markets, dragging many of these into insolvency. Avoidance of excessive leveraging with greater reliance on equity may well be the most important lesson to learn from the crisis. Businesses will be well advised to maintain adequate equity bases and to adopt judicious self restraint in borrowing, in preparedness for new international norms on leveraging expected from global standard setters now at work. Even within safe enough limits of borrowing, particular caution is warranted against excessive dependence on short term external borrowing, because these become very hard to refinance in crisis situations.

Mitigation of liquidity risks is another must-learn for the recent global crisis episode; large globally active financial institutions like the Lehman Brothers fell prey to the crisis even though maintaining adequate capital cushion. Both financial and non-financial businesses will need to be wary of actual or potential serious mismatches between maturity structures of their receivables and


payables.

While the roots of the global financial crisis were in the global imbalances, it was actually precipitated by serious dereliction in risk management and aberrant corporate governance in the troubled financial institutions seeking short term gains for small coteries in senior management and board at the expense of longer term institutional viability and the interests of general equity holders. As defenses against future crisis episodes, both financial and non-financial businesses must adopt and maintain high standards of corporate governance and risk management, with clear accountabilities and transparency in qualitative and quantitative disclosures for effective market discipline.

Let's shed light on the role of spontaneity of businesses in adopting self regulatory practices.

Global platforms of regulatory authorities and professional bodies are at work reviewing and revising regulatory structures and best practice standards in various areas including corporate governance, socially and environmentally responsible practices towards bolstering defenses against future crisis episodes. Open mindedness and spontaneous proactivity of businesses in seeking and adopting better corporate governance and safer business practices towards safeguarding longer term interests of all stakeholders can hugely facilitate progress.

I hope the initiative of this international conference will be a stepping-stone in that direction, creating and strengthening networks of communication and consultation for local businesses and their counterparts abroad.


Global Economic Crisis: Impact and Policy Responses*

The world economy has changed dramatically since September 2008. A year has passed since the collapse of Lehman Brothers-a watershed event for the world economy. The recession in many of the major industrial economies has already set several records.

Shortcomings in financial system regulation and supervision regimes are now under intense scrutiny everywhere. Authorities across the world responded quickly and decisively to prevent a potential replay of the Great Depression.

Huge infusion of public spending went into shoring up the failing financial institutions and paralyzed financial markets; money supply taps were opened wide to uphold consumption demand and economic activities in the real sector.

Making of the Crisis

The makings of the crisis were in the mounting global imbalances from about two decades of US external current account deficits; dollar's position as the dominant global reserve currency permitting indefinitely long spells of lax macro-economic policies in the US.

The export driven Asian growth hubs kept financing the US deficits avidly, piling up mountains of dollar denominated US debt as reserve assets.

J Two sides occasionally blamed each other for the:

J Excessive profligacy of the US, and

J Excessive frugality of Asia

J However, little was said or done about putting in place safeguards in the global monetary order against buildup of large imbalances.

Impact on Bangladesh

Financial markets and institutions in Bangladesh remained free of the toxic assets and contagion afflicting the global financial markets over the past couple of years, because of the limited, regulated exposure to the global economy.

*ADB Regional Forum on the Impact of Global and Financial Crisis. Session on Global Economic Crisis: Impact and Policy Responses, 15 January 2010.


J Economic growth in Bangladesh has thus far been only mildly impacted by the ongoing global slowdown, attaining 5.9 percent real GDP growth in FY 09 following the 6.2 percent growth in FY 08.

J FY 09 growth in inflows of workers' remittances (22.4 percent) and export receipts (10.1 percent) were well in excess of the tepid 4.6 percent growth in import payments.

J Foreign exchange reserve is more than USD 10.0 billion (a record).

J Apart from a net FDI outflow of USD 159 million in FY 09 there has been no additional outflow pressure attributable to the global crisis.

J Subject to the pace of global recovery with increased export orders and remittance inflows, real GDP growth in Bangladesh is likely to achieve or exceed 6% in FY 10.

Policy Responses

Bangladesh government made ample allocations in the FY 09 and FY 10 national budgets to uphold domestic demand by expanding the social safety net for the weak and vulnerable population segments, and to provide temporary support to economic sectors hurt in the global crisis.

J Exports facing demand decline and/or price decline in markets abroad were extended cash incentives at different rates out of allocations from the national budget.

J Fiscal stimulus for Tk. 4.50 billion to support recession-hit export sectors : Jute, Leather and Frozen food.

J Bangladesh Bank (BB) on its part has maintained easy monetary conditions to facilitate investment activities, allowed banks to reschedule non-performing export loans temporarily on more lenient terms, widened its foreign exchange lending window (the Export Development Fund) to banks for financing input imports of exporters,

J BB has also launched elaborate refinance support networks for promoting bank lending to under-served sectors of productive economic activities including agriculture, SMEs, sustainability /renewable energy related projects.

J Export subsidy/cash incentive has been enhanced for affected industries : frozen food, Jute and leather products (shipped April-June 09). Besides, plastic and finished leather products are included in addition to the existing 13 categories of export subsidies.

J Limit of advance payment from Exporters' Retention Quota (ERQ) has been enhanced to USD 10,000 from USD 5,000 for emergency import payment.

J Relaxation of loan rescheduling conditions, waiving down payment requirements (up to Sept 30, 2009) for recession-hit export oriented industries (depending on banker-customer relationship), especially frozen food, leather and leather products, jute and jute goods, textiles (including spinning) and RMG.


J Regulations for undertaking forward transaction of foreign exchange have been liberalized to reduce the foreign exchange risk in international trade.

J The limit for borrowing (single borrower) from Export Development Fund (EDF) has been increased to USD 2.0 million from USD 1.5 million for importing raw materials (Back to Back LIC) against export LIC.

J Interest rate cut in lending, prescribing ceiling of maximum 13 percent in financing trade, agriculture, large and medium scale industries, term and working capital and housing.

J Rationalization of service charges of banks and financial institutions; Introduction of 'E-commerce' operation in the banking sector; accelerated banking and business transactions, electronic fund transfer etc.

J Steps have been taken to obtain Sovereign Credit Rating for Bangladesh to facilitate borrowing abroad by private sector industrial enterprises, and confirmation of credit lines on more favorable terms.

Broad-based, inclusive, socially and environmentally responsible economic growth is viewed by Bangladesh Bank as the way forward in strengthening domestic demand with rapid reduction of poverty. Following some sluggishness in Q4 FY 09 and QI FY 10, available data indicate that from Q2 FY10 output and investment activities in Bangladesh are regaining momentum. Subject to global recovery not losing pace, the 5.9 percent FY 09 real GDP growth is expected to be exceeded or at least matched in FY 10.


SAARC Payment Cooperation*

You are aware that besides weathering fairly well the recent global financial crisis and economic slowdown, the SAARC region is fast emerging as a global growth hub with expanding financial and capital markets handling domestic and external trade transactions, savings and investment flows in ever larger volumes. Secure and efficient payment and settlement systems meeting international best practice standards are crucially important for this stature of the region as a hub of economic and financial growth. Regional co-operation and mutual support in upgrading the technical and regulatory infrastructures of the payments systems in member countries is the raisons d'être for this SPC. With SAARC member countries at different phases of financial market and payment system development, the scope of benefiting from cooperation and mutual support is substantial.

Working sessions of the meeting will review new payments system initiatives in member countries and the strategic roadmap for SAARC Payments Initiative (SPI), but I would like to mention here that a fully automated clearing and settlement arrangement for paper based and electronic payments has completed trial runs and is very soon to be formally commissioned in Bangladesh, with paper based instruments truncated at source and clearing based on digital images thereof. The Bangladesh Payments System Regulations 2009, and rules, regulations for automated clearing and settlement of paper based and electronic fund transfers have beenformulated and introduced, after extensive stakeholder consultation processes. To expand the outreach of the payments system to population segments in remote rural areas, the Payments System Regulations provide for involvement of non-bank IT platforms including mobile telephone companies, and Micro Finance Institutions (MFIs) as payment service providers, in partnerships with clearing house member banks. A number of these partnership arrangements are already in place. Over the medium term, the National Payments Council headed by Bangladesh Bank will work towards bringing the entire country within the automated clearing and settlement arrangement; and towards putting in place a Real Time Selected System (RTGS) for real time settlement of large value payments in financial transactions including trade insecurities. Designing and coordinating a regional approach to

*Opening address in the 7th SPC Executive Committee meeting, 28-29 March 2010.


cross border payments is one of the mandates for SPC; and evolving new technologies and financial innovations will be continually bringing in new technical, risk management and regulatory challenges for payments systems in our region and elsewhere. And I am pleased to know that adequate convergence is taking place in our payment systems in the region. I therefore see that this SPC co-operation forum will continue to remain relevant and desirable over the foreseeable future.


Developing Supply Chains in South Asian Textile and Clothing Industry*

The theme of this workshop'Developing Supply Chains in South Asian Textile and Clothing Industry' is truly interesting and the issue itself is sure to draw attention amongst stakeholders.

South Asian countries initiated the process of preferential trade liberalization with the establishment of the South Asian Association for Regional Cooperation (SAARC) in 1985. The South Asian Preferential Trade Agreement (SAPTA) came into operation in 1996 with the expectation of moving towards a South Asian Free Trade Agreement (SAFTA), the implementation of which eventually began in 2006. Under the proposed tariff liberalization program, SAFTA will become fully effective for non-least developed member countries of SAARC by 2013 and by 2016 for least developed member states, including Bangladesh.

Despite all this, South Asia remains a least integrated region with the intra-member countries' trade accounting for only about 5% of their total trade. When it comes to regional cooperation, most people in the region think of trade in goods alone. However, it is high time that the concept should be expanded beyond trade in goods if welfare gains are to be maximised. In this backdrop, extended cooperation involving services and infrastructure development, are being discussed at different forums. Apart from the areas of extended cooperation, the other potential scope arises from greater collaboration amongst business communities and entrepreneurs in the region. To the best of my knowledge, this is an area where we need to do a lot of work.

In fact, I don't think it would be an exaggeration to state that not much attention has been given in studying the potentials for building supply chains based on industrial units located in different countries within the region. While under an ideal situation economic fundamentals come into force to establish such supply mechanisms, starting from a state of very limited integration marred with numerous tariff and non-tariff barriers in the backdrop of often misinformed hostile policy environment, proactive initiatives need to be undertaken to

*Workshop on 'Developing Supply Chains in South Asian Textile and Clothing Industry', jointly organized by UNCTAD India Programme, Commonwealth Secretariat, and Centre for WTO Studies in partnership with South Asian Network on Economic Modelling (SANEM), 3 April 2010.


unleash the strength of regional co-operation based-on country-specific comparative advantage. Therefore, co-operation for developing regional supply chains holds great promises for growth and development in the region.

In the above context, this particular project - jointly undertaken by UNCTAD India Programme, Centre for WTO Studies, and Commonwealth Secretariat can shed important insights. As part of this project, research is being conducted to address the issues analytically and identify the potential supply chains, and then stakeholder consultations are being organised to discuss and disseminate the findings.

I find this project particularly interesting since rather than following a very general and broad approach, it looks into industry specific dynamics so that the research can be useful to policymakers and industries. The choice of the textiles and clothing sector as the case study is also well thought-out. Most South Asian countries have significant supply side capacities in the sector and thus it can constitute a very productive area of collaboration. Based on actual disaggregated trade statistics, these hands on research will indeed be of great relevance to industry representatives as well as those policy makers who care to take informed policy decisions.

I would like to point out that, on the whole the South Asian region is now poised for high economic growth. Despite the recent severe economic crisis South Asian countries on average have managed to achieve a growth rate around 6 percent. This shows certain features of our region's resilience to absorb external shocks while taking advantage of expanding domestic productive capacities. This is the time for us to give a big push towards extended regional cooperation.


Youth Employement Opportunities: Some Issues*

Globally, the post-meltdown recovery of formal job markets remain quite sluggish; extensive employment creation in micro, small and medium scale enterprises therefore remains crucial for generating employment and income; so as to quell possible social unrest or instability.

Risks in financing small-scale self-employment initiatives are high, and the formal financial sectors are not adequately geared to address the financing needs of micro and small enterprises, either in developed or developing economies. Financial sectors in developing economies have some extent of familiarity with financing small scale enterprises; but small businesses in many mature developed economies are known to be struggling for access to financing in the post-crisis period, although large corporates are freely drawing funds from both banks and capital markets. Apart from access to financing, there is need for mobilizing and motivating the unemployed and under-employed masses into creative, innovative entrepreneurship; the general and technical education and training establishments need to focus on promoting entrepreneurship and nurturing innovativeness. Micro and small scale enterprises also face substantial uncertainties in profitably marketing their output for consumption or for further processing; unless they can forge viable horizontal and vertical linkages with larger businesses.

Public authorities, NGO/civil society initiatives, official donor agencies, philanthropies and socially responsible businesses must work in unison to bridge these major gaps and shortcomings in institutional support arrangements for self employment initiatives; helping tie up small entrepreneurs, their financiers and larger non-financial businesses into durable, viable linkages. In Bangladesh the government and the central bank remains proactive in promoting lending for micro, small and medium scale enterprises through MFIs, commercial and specialized banks; supported by refinance lines from the government and the central bank. Government establishments spread throughout the country offer entrepreneurship training, particularly for the unemployed youth. BRAC and Grameen Bank in Bangladesh have succeeded in forging viable linkages of their

*The 5th Global YES Summit: Rework the World (Plenary session V: The Rework the World Investment Panel) held in Leksand, Sweden, 5 June 2010.


micro and small enterprise borrowers with their own non-financial subsidiaries in related business lines.

There are lots to be done in upgrading the entrepreneurship training arrangements; and linking up of micro and small enterprises with related larger socially and environmentally responsible businesses has to go much further. There is as yet no risk mitigation arrangement in Bangladesh for micro and small enterprise borrowers by way of partial loan guarantees. Equity participation from a government owned Equity Fund is available for medium scale enterprises in agro and IT based sectors, but this Fund or the few small private sector venture capital/private equity fund operations do not involve themselves in equity of small enterprises.

Possible options in addressing these issues are diverse, of varying applicability in varied situations. I am much impressed by the approach of this seminar of looking at examples across the globe, highlighting what has worked and why the same approach may or may not work elsewhere; and above all building up optimism and inspiration for proactivity. I am grateful to the Tallberg Foundation for the opportunity of participating in this seminar, and I look forward to international donor agencies and philanthropies helping broader dissemination of the successful examples; public authorities and MFI/NGO/civil society initiatives in Bangladesh will proactively learn from success examples elsewhere, while happily sharing their own success examples, and also welcoming assistance in know-how and resources.


Bangladesh Economy: Post Global Crisis*

Particularly for lowlanders like us Bangladeshis, attending this meeting in the rarefied unpolluted atmosphere of the high Himalayas is a special pleasure.

Let me present you here a brief overview of how Bangladesh economy has been faring in FY 10 following them odest growth slowdown in the global crisis (5.9 percent real growth in FY 09, against 6.2 percent of FY 08). To maintain growth momentum by upholding domestic demand in the face of weakening export demand in the traditional Western markets, the stimulus package in the FY 10 national budget enlarged the social safety net for the poor and vulnerable, increased the input subsidies and other support for agriculture, introduced/enhanced export subsidies for affected sectors aiming particularly at diversification into new products and markets. BB's monetary and credit policies maintained easy credit conditions for productive pursuits including easier loan rescheduling terms for affected exporters; implemented a strong agricultural credit program with a new lending scheme for sharecroppers; and ample refinance lines against loans for agriculture, SMEs, renewable energy and effluent treatment projects, low cost housing. The supportive fiscal and monetary measures effectively upheld domestic demand and the related economic activities, supported further by continuing growth in workers' remittance inflows (16.7 percent y-o-y growth in ten months of FY 10 up to April). Exports weakened in FY 10 however, with slower than expected demand recovery in traditional markets in the West. Exports grew by 10 percent in FY 09 but the weakening trend ensued in the later quarters and bottomed out in early FY10, recovering slowly thereafter but remaining in the negative in first three quarters of FY 10, back in positive growth in April 2010. Due to the continuing demand weakness abroad, export growth in FY 10 is likely to be in single digits. Consequent to the slower export growth, real GDP growth in FY 10 is projected to fall somewhat short of the initial expectation of around six percent, despite good agricultural output and buoyancy in domestic demand.

Like exports, imports also remained slower in FY 10 with growth in the negative in first three quarters; mainly because of lower input imports for export manufacture, but also because good domestic harvests meant low need of food grain imports. Low outflows for import from export receipts and growing inflows

*39th ACU Board Meeting, Bangladesh Country Overview, Thimpu, Bhutan, 30 June 2010.


of workers' remittances has strengthened external sector viability with widening current account surplus and reserves exceeding USD ten billion, but this is also keeping liquidity high in the money and credit markets, creating pressure on consumer prices and asset prices. 12 month point-to-point CPI inflation crept up to 9.06 percent in February 2010 from 2.25 percent of end-June 09, with food price inflation in double digits. Real estate prices are for some time now under bubble-like pressure, and overvaluation of stocks with weak fundamentals evidence irrational capital market behavior. To keep inflationary trends in check, BB has adopted a number of measures including prohibiting banks from own account land acquisition without prior BB authorization and from customer lending for land purchase, close monitoring of capital market activities of banks, and enhancement of CRR and SLR for scheduled banks by 0.5 percentage point with effect from 15th May, 2010. Steps taken by BB have started showing results, credit growth slowed down in March, with p-to-p inflation easing down to 8.78 percent. A strong 51.6 percent increase in LC opening for capital machinery imports evidence robust pickup in new investment momentum, boding well for output growth in FY 10 and beyond. Much will depend however on quickly addressing the shortages in power and gas supplies, for which public and private investments are being mobilized by the government with the highest priority.

The financial sector in Bangladesh went through a number of notable milestone events in FY 10. Foreign exchange reserves reached and exceeded USD 10 billion for the first time in November 2009; a July 09 FSAP update and stress testing IMF mission assessed the Bangladesh banking sector as being in healthy shape, reporting major progress in strengthening soundness, stability and resilience, Basel II capital regime was introduced for banks from January 2010; BB commissioned a solar power system at its head office main building in March 2010; automated settlement of paper-based and electronic fund transfers in the Bangladesh Automated Clearing House (BACH) commenced operation from April 2010; and from the beginning of FY 10 BB has been pressing on with a major initiative for fuller, deeper financial inclusion of all population segments and all economic sectors thus far underserved or not served by the financial markets. To this end, BB has been encouraging bank-led partnerships between banks, MFIs and mobile phone/smart card based IT platforms in introducing innovative cost saving financial service delivery packages tailored to the needs of specific customer segments. Also, around nine million new accounts in the names of farmers have been opened by state owned banks for direct delivery of government cash subsidies for agricultural inputs, with nominal opening deposit of only Taka ten per account. BB sees financial inclusion as an important tool in promoting inclusive growth with rapid poverty reduction. The first ever sovereign credit rating of Bangladesh by S&P and by Moody's in April 2010 was a milestone for the Bangladesh economy. S&P assigned BB-/B ratings with stable outlook, Moody's assigned Ba3 rating with stable outlook, placing Bangladesh only behind India in South Asia. The Government of Bangladesh does not however intend to access non-concessional commercial borrowing from international markets; it is to facilitate borrowings by private sector investment projects including those under public-private partnership that Bangladesh has opted to obtain sovereign credit rating.


As of all other ACU members, trade settlements of BB under the ACU arrangement declined substantially in 2009, understandably as a consequence of slowdown in global output growth and global trade. I notice a heartening incipient trend of increase in the last two settlements in March and May 2010. Hopefully, with pickup in economic activities in our region, the episode of decline will soon be behind us.

It will be pertinent to ask ourselves whether the ACU is likely to encounter any crisis of confidence, given the current fiscal stresses (and consequent pressure on Euro) in some members of EU, thus far the most successful monetary union. We may recall that the recent global financial crisis was precipitated mainly by private sector profligacy in the US; while the EU is now afflicted because of profligacy of the public sector in some EU member countries, far over spending the deficit limit (three percent of GDP) set by EU discipline. Hearteningly, people in our Asian region are culturally much less addicted to debt.

We need to preserve and foster this cultural attitude with appropriate policy steps, discouraging unbridled expansion of wasteful borrowing and spending both in the public and private sector. At the same time, we need to be proactive in investing our savings into growth generating real investments including much needed physical infrastructure in our region, instead of piling up huge low yielding reserve balances in currencies of other regions.


Emerging Economic Outlook and Policy Challenges for South Asian Economies*

Asia's outstanding performance during the global financial crisis has not only pulled the region out of recession, but also helped steer the world economy toward recovery. South Asia is projected to grow at high rate of 7.8 percent in 2010 and 2011(Asian Development Outlook 2010), significantly above 2009 performance of 6.7 percent real GDP growth, underpinned by strong domestic demand. Sustainability of this rapid growth will require policies to boost consumption and investment. South Asia needs to continue efforts to rebalance sources of growth more toward domestic and regional demand, focusing on inclusive growth towards rapid eradication of still pervasive poverty.

Bangladesh economy weathered the global financial turmoil well owing to the absence of toxic assets in the domestic financial market and limited, regulated openness to short term external capital flows. Even during the crisis period, Bangladesh maintained firm footing on growth path, with real GDP growth rates of 5.74 percent and 5.83 percent respectively in FY 09 and FY 10. The growth target for FY 11 is 6.7 percent, quite attainable given strong turn around in exports and healthy growth in agricultural and industrial output. During first quarter of current fiscal, export receipts and import payments increased by 30.0 percent and 37.0 percent respectively.

Closer regional cooperation in South Asia will greatly facilitate coping with the challenges of faster economic growth for rapid poverty eradication. A few of the issues of likely benefit from regional cooperation are as follows:

Manpower utilization:

The emerging outlook for the South Asian economies is bright, given their favorable demographics with large pools of cost competitive young manpower for output activities in labor markets within the region and elsewhere; these pools of young population also comprising robustly growing bases of domestic demand. Challenges facing these economies in eradicating poverty and equipping

*The Third South Asia Economic Summit on "Regional Economic Integration, Climate Change and Food Security Agenda for the Decade 2011-2020"; Session on:Emerging Economic Outlook and Policy Challenges for South Asian Economies, held in Kathmandu, Nepal, 18 December 2010.


their manpower pools with knowledge base and skills appropriate for the twenty first century global economy are also enormous. Sustained high fiscal outlays of social sector expenditure will remain necessary for human development and food security, in interventions targeted towards opening up blocked advancement opportunities for the less advantaged. Possible benefits from South Asian regional cooperation in human development and optimal manpower utilization remain largely unexploited. The region's productivity can be higher with freer labor mobility and extensive intra-regional outsourcing of intermediate stages in manufacturing and in business processes; optimally exploiting the diversity in comparative advantages across the region, expanding trade and employment in manufacturing and services. Governments in South Asia can be proactive in fostering enabling environment for the private sector in locating and utilizing opportunities of intra-regional outsourcing in output activities.

Intra-regional trade remains a minuscule part of overall external trade of the South Asian economies (excepting the landlocked ones), due mainly to low income levels limiting demand within the region. As indicated in the preceding section, export of final outputs from South Asia to the rest of the world can benefit from outsourcing of intermediate processing stages across the region. Apart from this, rising income levels and purchasing power in the faster growing economies in South Asia are imparting them capacity of absorbing more of the final outputs. South Asia needs therefore be proactive in promoting intra-regional trade, in both intermediate and finished outputs. Liberalization of intra-regional trade in South Asia is proceeding at snail's pace, mainly for fear of the adjustment cost burdens within individual economies that regional integration of output and trade activities will entail. Greater gestures of generosity on the part of the larger, faster growing South Asian economies will be important in building support for and confidence in the integration processes in the region's smaller economies.

It is a major collective policy failing that South Asia's substantial savings in the form of foreign exchange reserves enrich financial centers in the West, while real sectors in economies in the region remain starved of investment in much needed physical infrastructure to support output growth. For a substantial thrust in growth and poverty eradication, it is high time now for governments in South Asia to re-deploy substantial parts of their foreign exchange reserves into sovereign wealth funds actively investing in infrastructure and other real sector projects in the region. The SAARC initiative of creating a regional investment fund has thus far proven feeble and disappointing, sovereign wealth funds of individual member countries would be much simpler to organize and activate fruitfully.

Food security in South Asia will hinge importantly on promoting output and maintaining openness to intra-regional trade in essential food grains. Intensifying co-operation in research and breeding of new higher yielding seed varieties capable of withstanding the climate change challenges should figure prominently in the agenda for food security.

Towards maintaining growth trend in food grain output, the region needs to draw up adopt an integrated regional plan for water resources development and utilization, keeping in view the climate change threats and the needs in individual


member countries. One simple approach to operationalizing the SAARC Food Bank idea would be to support member countries in maintaining their own buffer stocks of essential food grains, and to commit to openness in intraregional food grains trade at times of pressure in global markets.

Eradication of extreme poverty is a sine qua non for food security in terms of affordability; poverty eradication must therefore be a high priority in South Asia.

The human development and socio-economic growth initiatives must be inclusive; focusing on social empowerment of the disadvantaged population segments, opening up advancement opportunities for them. Co-operation and exchange of ideas and experiences in deepening social and financial inclusion merit being on the discussion agenda in regular South Asian regional co-operation platforms.


Challenges and Opportunities of the Changing Global Economy: Way Forward for Bangladesh*

I am happy to be invited to this Independence Day Commemorative Roundtable Discussion on the way forward for Bangladesh in facing the challenges and seizing the opportunities in the changing global economic environment. The theme papers presented by the eminent designated speakers have already given us valuable insights and food for further thought on these issues; let me nevertheless share with you a few thoughts of my own on some reorientations in our development strategies called for by recent trends in the global scene.

Firstly, breakdowns in international supply commitments for essential food commodities during periods of sharp price spikes, seen both in the run up to the global financial crisis as also lately in the recent past months, have exposed the limitations of globalized world trade as dependable means of access to essential commodities. While at normal times import of an essential food commodity may be more cost effective than its local production, during a sharp price spike due to crop failure or disturbances in major source countries, external trade in the commodity tends to freeze up altogether, jeopardizing food security of countries heavily dependent on imports. This is why we must place high priority on supporting and promoting adequate agriculture sector output in food grains, dairy, poultry and fish farming. Bangladesh Government has quite appropriately placed agriculture high in development priority, and one of the main thrusts of Bangladesh Bank's campaign promoting financial inclusion is to channel adequate credit flows to the agriculture sector. Engagement in agricultural financing is now mandatory for all commercial banks; partnerships between banks, micro-finance institutions and IT platforms including mobile phone operators are being encouraged to innovate cost saving, risk mitigating financial service delivery modes suited to the needs of farmers in remote rural regions. One of these innovative credit delivery mechanisms targeting the needs of tenant farmers, introduced last year, has already reached out to 2 lakh tenant farmer households with adequate financing, and is expected to expand to another 0.3 million of them in the coming days. A growing and healthy agriculture sector

*Independence-Day Commemorative Roundtable Discussion on 'Challenges and Opportunities of the Changing Global Economy: Way Forward for Bangladesh', 24 March 2011.


spawns numerous backward and forward linking growth strands in the industry and services sectors, generating virtuous circles of rising employment and income.

Secondly, the global financial crisis laid bare the perils of unbalanced one-sided strategies of economic growth and management. Over past several decades East Asian economies pursued export-driven growth, readily accommodating foreign consumption on credit but with no comparable stimulation of domestic consumption. On the other hand the US and many other mature Western economies went on credit fueled domestic consumption growth, buying up physical exports from the East and selling complex, opaque debt-based financial products and derivatives, much of which proved to be toxic and bereft of value as the global crisis precipitated. The East recovered quicker from the crisis with robustly growing domestic demand for goods and services; in the mature West deleveraging by debt-ridden households has still some way to go before consumption growth regains its pre-crisis briskness.

The post-crisis global economy on two track recovery path warrants some shift of emphasis in growth strategy for Bangladesh, from export-led to domestic demand-driven growth. To this end the government is steadily expanding social safety net expenditure outlays in annual budgets. Employment and income generation by new private and public sector investments are continually augmenting domestic demand; rise in wage levels for rural day laborers, and revision in wage structures for apparels export sector workers have also helped underpin domestic demand. Bangladesh Bank's financial inclusion campaign is also contributing towards bolstering domestic demand; promoting financing of micro and small enterprises is the other major thrust area of the financial inclusion campaign besides agriculture. The urgency of supporting emergence of employment generating small and medium scale enterprises has heightened further in the context of recent influx of migrant workers returning from the trouble-hit Middle Eastern countries.

The needed higher emphasis on the domestic demand-driven component of growth does not of course negate the need for supporting our export sector, which is now resurgent with nearly forty percent growth rate. Bangladesh will need to continue with her pursuit of export-led growth (unlike exports of China and the East Asian economies, exports of Bangladesh are mostly on payment at sight rather than on credit basis). As demand in our traditional markets in North America and Europe will take time to recover to pre-crisis levels, we shall need to look for geographical diversification of our exports to newer markets including the fast growing emerging economies in South and East Asia. Inviting investors from the target markets to use Bangladesh as production base for items in demand in their home countries would be useful in rapidly expanding exports to these new markets. Strategists and policy makers in the government are already cognizant of these, and are designing policies and work plans accordingly; a substantial number of commitments of favorable access for our exports have already been obtained in trade negotiations with some fast growing economies in East and South Asia including India and China. Despite risk factors from recent events in the global scene like the unrests in Middle East and the sequence of earthquake-tsunami-nuclear disaster in Japan, Bangladesh is well on course for


near seven percent real GDP growth of broad-based, inclusive nature in FY11.

Bangladesh will certainly be an important member of the Asian League of top performers that are destined to contribute more than half of the global GDP by 2050 and ensure better quality of life for most of their citizens. Bangladesh is even in a better position than its neighbours because of its early gains in social development which is a manifestation of its broad-based, inclusive growth. This is also reflected in its faster reduction of poverty (currently population under poverty line is 30%) and achievement of some of the crucial MDGs. All this augur well in fulfilling the dreams of our economic emancipation, the core promise of economic freedom given by Bangabandhu, the father of the nation. Let the souls of him and other martyrs live in peace and dignity.

Multi stakeholder discussions like today's roundtable are very useful in raising mass awareness on issues of crucial significance for our economic life like these, and I heartily thank and congratulate DG BIISS for sponsoring this roundtable discussion.


Global Financial Crisis and the Strengths of Islamic Banking System*

In a recent international seminar in New Delhi on post-global crisis agenda for financial sector regulation, I pointed out the strengths of Islamic banking that served well to protect Islamic banking during the global financial crisis while many conventional banks and financial institutions collapsed, including some with global stature and renown. The profit and loss sharing nature of liabilities of Islamic banks is a good safeguard against solvency risk, while prohibition of financial speculation serves well in keeping their books free of speculative assets and derivatives that proved toxic and worthless in the crisis.

These strengths of Islamic banking are now attracting conventional banks in increasing numbers, including large global ones into Islamic modes of financial services. In Bangladesh, Islamic banking constituted 18.5 percent of deposits and 19.7 percent of advances of the banking system in 2010. Recently, we have circulated a comprehensive guideline for Islamic Banking which has facilitated this category of banking. However, we have not yet been able to develop the secondary market for various Islamic financing products in Bangladesh for which a portion of the money deposited in the central bank by Islamic banks remains idle.

As a member of IFSB, the global forum for promotion and regulation of Islamic financial services, Bangladesh Bank looks forward to steady further progress of Islamic Banking, both locally and globally. The ethos of Islamic banking serves well to keep it free of laundering money associated with crime; I would like to conclude here reminding you all about the need of alertness in keeping it free also from any influence of extremists aiding and abetting terrorism.

*International seminar on 'Global Financial Crisis and the Strengths of Islamic Banking System', organized by Islamic Banks Consultative Forum, 24 May 2011.


Towards an Inclusive Growth in South Asia: Role of Regional Cooperation*

Countries in South Asia are all on path of growth and poverty reduction, at varying paces and with varying patterns of inequalities in income and advancement opportunities for the poor. Larger economies like India have been growing at sustained high rates aided by huge inflows of external investment; among the smaller economies Bangladesh has maintained somewhat slower but steady, stable growth with much lower levels of foreign investment inflows. On many counts of social advancement indicators smaller economies like Bangladesh and Sri Lanka have been faring better than their larger, faster growing neighbors, indicating that growth processes in these smaller economies have been more inclusive and equitable. Problems like inadequacy of physical infrastructure and income poverty in large segments of population bedevil most of the South Asian countries, big or small. Financial markets in South Asia have proven ill equipped in intermediating the region's foreign exchange reserves into investments needed in the region.

This chequered picture of South Asian growth clearly makes a compelling case for regional co-operation and integration as the way forward towards faster, more inclusive growth and poverty reduction. It is well acknowledged that all South Asian countries have useful lessons for each other in approaches to physical and human development, trade, investment, poverty alleviation and so forth; and that there are lots to be gained from promotion of intra-regional trade and investment by way of output, income and employment. There have been numerous initiatives, bilaterally as well as multilaterally in the SAARC forum. Despite numerous rounds of extensive dialogue and agenda setting, meaningful progress in concrete terms remained slow over the decades. However, in the past couple of years we can see significant headway in several directions, including tariff free entry of Bangladeshi apparels into Indian markets, trans-border movement of goods, freer movement of border enclave residents to their main lands, and activation of 'border haats' for local trade in produces of residents of the border regions. These progresses will hopefully be followed by substantial pickup in intra-regional investments in physical infrastructure and in manufacturing for markets in the region and beyond. To ensure continuing

*Fourth South Asia Economic Summit: Global recovery, new risks and sustainable growth: Repositioning South Asia, organized by Centre for Policy Dialogue (CPD), 23 October 2011.


progress, we need to identify the factors behind the recent progress and take these further forward.

Firstly, I believe that restoration of warmth of bilateral relations between Bangladesh and India has played a crucial role. Good bilateral ties help build sound base for fruitful multilateral co-operation; efforts for the later founder when bilateral ties remain frigid.

Secondly, closer communication and contact between decision making public authorities, businesses, academics and civil society organizations in South Asia can build strong bases for co-operation and learning from each other's efforts; consolidating trade, investment, social and cultural ties. Inclusive growth, rapid poverty elimination and attaining and/or exceeding the UN MDGs are high priorities for all countries in South Asia; there is much to be gained towards these goals from exchange of experiences and ideas in promotion of financial inclusion, lessons related to addressing the challenges of climate change, extension of primary healthcare, hygiene and social safety net, basic education, job training and so forth, both at government and at non-government citizen's initiative levels. Such contact and communication processes have been growing over the years but have much further to go. Visa-free movement of people within the region can hugely facilitate these processes, and would be much desirable as a medium term goal for the SAARC region. With closer, more harmonious social and cultural ties consolidated by these processes, freeing up labor mobility within the region will become an attainable reality rather than a far-fetched dream as it may now seem to be.

The regional co-operation priorities I am highlighting here, though of rather general nature, are no less relevant to the current imperatives in facing the looming risks of another possible global slowdown. Sustaining output growth in the face of weakening export demand markets outside the region will require upholding demand within the region with co-operation in expanding intra-regional trade, in expanding social safety net public expenditure for the poor and vulnerable, in utilizing part of the region's substantial foreign exchange reserves in supporting investments in the region in employment intensive infrastructure and manufacturing projects. Mutually supportive fiscal co-operation in such periods of external stress will help pave the foundation for eventual integration in a South Asian economic and monetary union as a prominent hub of global growth.

In particular, the South Asian economic growth must not only be accelerated but also be restructured in such a way that its capacity to reduce poverty is enhanced for given growth rates of GDP which, of course, have been enhancing significantly. In this context, South Asia must aim at achieving quality growth i.e. pro-poor growth by encouraging more joint-venture projects for accelerating growth of sub-sectors like agriculture and industry with high employment elasticity, regional network of support industries in the private sector facilitating SME growth in regional growth nodes, and of course, regional skill development centers for shifting labor force from low to high skills and thereby increasing productivity and income earning capacity of the poor.

Let me conclude here with shedding lights at some potential scopes for


enhancing regional co-operation in infrastructural promotion, particularly in the areas of telecom and internet, energy and transport. A regional telecom network and a high-bandwidth, high speed internet-based network could help improve education, health and innovation. More broadly, this would strengthen the competitiveness of South Asia in the services export sector. Cross-border transport restrictions are a huge constraint on trade and investment in South Asia. Unhindered access to regional ports will raise income for all countries. South Asia's poor would probably gain most from regional co-operation in water and climate change. Cross-border co-operation on water between India, Bangladesh, and Nepal offers potential long term solution to flood control and water shortages.


Global Economic Turmoil and the Outlook for South and South-West Asia*

The global economy only just coming out of the slowdown triggered by the 2008-2009 global financial crisis, is now facing fresh threat from the ongoing European debt crisis.

While the 2008-2009 crises was largely from irresponsible excesses in household and corporate sector debt levels, the European crisis has been triggered by unsustainable debt levels in the public sector.

Growth slowdown in North American and European mature advanced economies is therefore likely to linger. Demand weaknesses in these developed economies are already affecting export-led output growth in the developing economies selling to these markets. Investment outflows from developed economies will also remain depressed by the prolonged slowdown, further clouding the growth outlook for developing economies.

South and South-West Asia (SSWA) region suffering substantial growth slowdown in 2008 and 2009 (to 3.4 and 3.5 percent respectively, from 7.7 percent of 2007; c.f., Statistical Yearbook for Asia & Pacific, 2011, UNESCAP) need appropriate strategies, both internal and external, to cope effectively with the fresh threats to growth recovery.

The first priority would be in learning the right preventive lessons from the recent global instability episodes. Countries in the SSWA region will be well advised to preserve balance and stability in their own economies, limiting both public and private sector debts to sustainable levels. Besides safeguarding stability within the region, this will enable SSWA to raise forceful collective voice in global forums against external spillovers of loose internal policies of large economies creating global imbalance and instability.

Coming next in priority is the strengthening of thrust for domestic demand driven growth, with appropriate income and supply augmenting policies. This would entail widening of the publicly funded social safety net coverage for the weak and vulnerable population segments; providing some measure of support for the export sectors affected by slowdown in their traditional markets, and

*Fourth South Asia Economic Summit: Global recovery, new risks and sustainable growth: Repositioning South Asia, organized by: Centre for Policy Dialogue (CPD), 23 October 2011.


stimulating feasible pursuits of in all sectors, particularly emphasizing financing and other supports for the micro and small scale farm and non-farm enterprises the under-served population segments. Bangladesh successfully used these approaches in sailing through the 2008-2009 global financial crisis with only mild slowdown in growth. Bangladesh Bank's ongoing financial inclusion campaign supporting productive pursuits of micro, small and medium scale enterprises has played significant role in simultaneously stimulating new output of goods and services, and the new purchasing power for domestic consumption thereof.

Looking for alternative new export markets in the backdrop of demand weakness in the traditional markets in mature advanced economies figures importantly in priority, towards upholding the export driven component of growth. Increase in SSWA intra-regional trade can substantially compensate for decline in trade with the mature advanced economies in slowdown. To this end I look forward to the new SSWA sub-regional office of UNESCAP opening today assuming a catalyzing role in negotiating new win-win intra-regional preferential trade and tariff arrangements between the SSWA countries.

The massive investment needs for addressing the crippling deficiencies in physical infrastructure, listed last in this menu of priorities, is however as important or more so than the preceding ones, for all countries in the SSWA region. Here the obstacle is not that the region lacks the necessary investment resources, but that the needed resources are not being unlocked from the typecast traditional mould of deployment in very low yielding short term investments in Western currencies at huge opportunity cost of alternative much higher yielding longer term investments supporting crucially needed infrastructure projects. Since the onset of the global financial crisis of 2008-2009 we have been hearing a lot about utilizing part of Asia's massive foreign exchange reserve accumulations (nearly three trillion USDs) for the much needed buildup of physical infrastructure; but with little visible actual progress. I believe all countries in SSWA are in a position to set aside a portion from the investment tranche of their foreign exchange reserves for investment specifically in high quality financial assets related to infrastructure projects in the region. These investments in assets with somewhat different liquidity and risk-return profiles from conventional reserve assets can be handled through sovereign wealth funds at country level, or through a multilateral infrastructure fund at SSWA regional level. Proactive drive for concrete progress in these directions brooks no delay; and I would urge the new sub-regional SSWA office of UNESCAP to catalyze the necessary initiative.


Creating More and Better Jobs in South Asia*

I have glanced over the report 'Creating More and Better Jobs in South Asia' and I want to start by congratulating the authors for the rich analysis and succinct recommendations on how to create more and better jobs in South Asia. I would like to make a few points on the issues relating to Bangladesh and the overarching theme for my address is 'making the most of the next ten years.'

Let me explain why. A key point made in the report is that Bangladesh needs to cash in on its demographic dividend. Our ratio of working age population to the total population is steadily rising due to the impressive progress we have made in fertility reduction. This means our dependency ratio is falling and there are more people who can contribute productively to growth and society at large. However, as the example of Sri Lanka, and many other countries outside the region, clearly illustrates this demographic dividend does not last forever. At some point this bulge in the working age population will transform itself into a bulge in the elderly population. As such in the next ten years or so we have to make the most of this low dependency ratio to invest in our country's future by making sure that we do not carry on 'business as usual.' We must use this next ten years to create higher productivity jobs, intermediate the savings that this working population has to invest in our country's infrastructure and institutions and build the foundations to prepare for when this dividend is over, such as, a funded pension system which will take care of the elderly. The next ten years is the best opportunity for us when we have to drastically cut poverty in Bangladesh. So how can this happen?

First of all, in order to create jobs we need macro-stability and it is because Bangladesh has experienced long periods of stability that it doesn't come up in the top five lists of concerns in your report! Compared to its peers Bangladesh's growth performance has been remarkably stable as has been its macro-stability. This year we have seen some macro pressures but we are managing them. Take the example of the exchange rate. In order to reduce the number one constraint to investment confirmed again here, the government decided to invest in power plants that would quickly address the power shortage but which required higher oil imports. As a result the taka began a natural and expected depreciation, also

*'Creating More and Better Jobs in South Asia', organized by: The World Bank, 28 February 2012.


prompted by the depreciation of the Indian rupee. At that point some commentators speculated about a "free-fall" of the taka. Yet back in early December my senior management team and I took the tough decision that we will do what it takes to avoid a so-called 'free-fall', even if it means a temporary squeeze on the economy. We spent many days debating the policy trade-offs but decided that we need to sharply tighten domestic money markets and import demand. Many were skeptical when on January 26th we launched the new MPS and said that soon we would achieve an exchange rate equilibrium. Yet you have seen the results with the exchange rate turning the corner in early February. In parallel we have limited foreign reserve depletion and in fact this week we are back to $10 billion plus in reserves. But even in the weeks when reserves were declining we had back-up plans about lines of financing from various commercial sources. The point I want to make with these examples is that we often take decisions which are market sensitive and so we operate quietly. But be assured there are a set of competent and dedicated professionals who work in the key economic institutions in this country who have maintained this track record of macro stability even in the face of many exogenous shocks. Similarly I would request that our friends in think-tanks and development partner agencies also regularly discuss the strategies we are taking, so that you don't contribute to over-hyping short term pressures. One macro-economic challenge remains which is inflation. As you all know we are focused on bringing this down to single digits. If you look at the India experience which historically closely matches us in terms of inflation trends, there inflation has come down in the last two months after 18 months of monetary tightening. We started our tightening six months after India and therefore we hope to see results later this fiscal year. Both broad money and reserve money growths are within our targets and this indicates that we are moving towards achieving our inflation target.

The second point I want to make is that relates to what factors impede firms from investing more. A slew of surveys over the past ten years point to the same issues as does this report. Just to repeat firms report electricity, corruption, political instability, access to land and tax administration as key impediments. For many of these there has been clear progress especially due to greater recent investments in power generation and in e-governance. Of course there is still a large unfinished agenda. However for the access to land issue we have to accept that our limited geographical land-mass and growing population will make this constraint even more serious in the future. As such new industries will have to take this account and we need to finance and nurture those which require less land-use - and in this context service sector industries come to mind.

My third point relates to the vision of what type of job-creating growth do we want to see and how can all actors, be it government, private sector and development partners support this vision? My own sense is that so far relatively low wages have given Bangladesh a competitive edge in garments but that this low cost advantage may not be enough to compete globally in the medium run. As such we need to strategically build the skills required to move up-market both in garments as well as in other industries such as shipbuilding, pharmaceuticals, ceramics, jute, leather products, agro processing and so on. But more fundamentally we need to recognize that the services sector now contribute about 50% of GDP. So how can we move to higher productivity service sector


based job creation? Just like garments we will need to start somewhere and then go on building up. For instance we can gradually increase our share of the e-services market. It may start 'low-end', as say the data entry business shifts from India, but eventually we want to become more 'high-end', producing world-class software etc. And we have already demonstrated to the world that we have enough strength here in the focus of energetic young entrepreneurs, facilitating regulatory regime and a vast pool of educated youths. There are a number of Business Process Outsourcing firms which have come to us recently and we welcome them as this could be a key source of employment for the larger numbers of educated youths coming out of our educational system. In general we need to debate different views but what we need is a forum for these discussions so that the Government and private sector can regularly get together and discuss both their immediate issues as well as a medium term vision of job creation.

My fourth point is that in order to take advantage of this demographic dividend, and build a high productivity jobs vision, we need to increase female labor force participation. Let me say at the outset, I am not convinced by the low numbers you have for South Asia in this report as when I travel around the country I see many women taking part in different economic activities including agricultural and of large non-farm activities. Self-employment is yet another robust area of our achievement. However the point remains that more can be done. We have got over the societal taboos about women working and now we need to promote their productivity and mobility. As such I believe we should emulate the example of the Philippines which sends millions of females overseas for various care-giving jobs and need to take advantage of the growing opportunities in aging populations abroad. Public-private partnerships can promote the financing of private sector nursing and vocational training institutions and from BBs side we will work with the relevant ministries to promote a strategic approach for our overseas migrants.

In order to increase labor force productivity we clearly need a healthier workforce. The one diagnostic which is truly different in this report in terms of the constraints to better jobs is the emphasis on early childhood development. We typically do not link the importance of so-called social sectors to the growth agenda and this report shows very clearly how the learning and nutrition in the first two years of life are so crucial for future job prospects and overall economic growth. This is why the vision for job creation needs to be championed by a ministry which can co-ordinate across a range of government and non-government agencies and make these linkages.

Finally, let me point to the ways that the Central Bank is contributing to job creation in Bangladesh and say something about the role of our development partners. From our end we have ensured adequate flow of credit to the private sector while balancing the needs for macro stability. This year's private sector credit growth target of 16% is more than adequate to meeting economic growth targets while keeping our monetary program consistent with reducing inflation to single digits this year. This is quite consistent with our regional peers. Of course, right at the moment the private sector credit growth is healthier at 19%. We are promoting bank downscaling and automation to permit the transition from


collateral to risk-based lending, segmentation of clients by risk levels, and diversification of the lending instruments. In addition we have expanded special programs for areas such as SME finance and agricultural credit which are engines of job creation in Bangladesh. In fact over the past year SME lending was 21% of overall commercial bank lending. In general we are moving towards greater financial inclusion as a way of supporting growth with equity in Bangladesh.

Turning to my suggestions for development partners I would urge you to also keep this demographic dividend lens, and the golden opportunity of this next decade, firmly in mind when you develop your programs. Do invest in infrastructure, skills development and labor market programs now while keeping in mind the aging population scenario which will emerge once the demographics change. Do support initiatives which bring the Government and private sector together for regular dialogue. Do also share cross-country knowledge on a regular and timely basis. This report illustrates the depth of resources you have at the World Bank. However my suggestion is not only to do these very useful occasional one-off events but use the high frequency data you collect and provide us with regular comparisons and analysis of various aspects of our economy especially compared with other benchmark countries.

As the governor of central bank my mandate should limit me to talk about macro stability and the financial sector. And most of my time I do focus on these issues. But I also believe that if we operate in silos and don't recognize the importance of other ministries and other agencies mandates then we will not achieve our shared goal of a fast growing, productive and equitable Bangladesh.


World Marketing Summit 2012*

Growing faster than earlier decades and steadily nearing the middle income country GNI threshold, Bangladesh economy is aspiring for bigger quantum leaps in growth and poverty eradication.

A key requisite in this pursuit is the unlocking and harnessing of creative, innovative potentials of different population segments of the society.

Financial inclusion is crucial in this inclusive approach to economic and social growth, as all investments in income and employment generating pursuits require adequate access to financial services like payment settlement, deposit taking, lending and insurance.

Bangladesh has positioned herself in the global community as a forward looking nation, with firm footprint on path of steady, accelerating growth and development towards rapid poverty elimination and eventual prosperity.

From the initial position as a primary goods producing small agrarian economy Bangladesh has by now transformed into a globally integrated manufacturing economy, a leading apparels and textiles exporter gradually breaking grounds into newer areas like shipbuilding, light engineering, IT enabled services, and so forth.

Against the backdrop of rather downbeat current global growth outlook, output activities in the Bangladesh economy are powering ahead buoyantly; catering to strong domestic demand from a domestic population base of 150 million as also from export markets.

Bangladesh exports continue to grow at double digit rates (14.3 percent y-o-y in the first seven months of FY 12).

Bangladesh has already earned acknowledgement as a vibrantly growing emerging economy. The most recent recognition is from UNDESA, as a 'rising star' in economic growth and fiscal discipline.

A large pool of young workforce is available to investment projects in Bangladesh at low, extremely competitive costs.

*Panel discussion on Quantum Jump for Bangladesh at 'World Marketing Summit 2012', 2 March 2012.


Over the past 40 years, nominal GDP in USD has increased more than eighteen-fold, while the population has increased a little over two-fold.

Real GDP growth rate which was only 1.1 percent and 3.2 percent during the 1970's and 1980's respectively, has increased to 5.8 percent on an average during 2000-10. In FY 2010-11 real GDP growth rate was 6.7 percent and is projected to grow by 6.5-7.0 percent in FY 12.

Trade openness has integrated Bangladesh with the global economy; with trade GDP ratio rising from around 20 percent of the 1970s and 1980s to 40.7 percent in FY 11.

Poverty has come down to about 30 percent of the population now, from around 57 percent in the 1990s.

Bangladesh is ahead of most of the South Asian nations in progress in human development indicators.

Rising emigration from our youthful population to labor markets abroad have been fetching steadily growing wage remittance inflows; bolstering external sector viability and per capita GNI, helping progress towards crossing the middle income country group income threshold by 2020.

With sustained development dynamism powering our growth pace we aspire for joining the group of upper middle income countries by 2030 and mature developed economy status by 2050.

Bangladesh Bank (BB), the country's central bank, is contributing to the nation's efforts to speed up inclusive growth not only through its traditional role in protecting monetary and macro-economic stability but also by orchestrating a comprehensive financial inclusion campaign drawing all banks and financial into spontaneous engagement in extending financial services for all productive pursuits of all under-served or un-served population segments in the society.

This campaign is spawning streams of innovative approaches at BB and in the broader financial sector in efficient, cost effective delivery of financial services tailored to suit diverse needs of the diverse new target customer groups.

Taking stock of the already accumulated sizeable number of innovative steps under the umbrella of deepening financial inclusion in Bangladesh will hearten and motivate us towards further initiatives on the path ahead; besides also bringing to attention to need if any of new structure for managing risks associated with the innovations in financial service delivery.

Because BB's financial inclusion initiative started off with sensitization of banks and financial institutions to their Corporate Social Responsibilities (CSR), drawing them away from speculative proclivities towards support of productive pursuits, financial services extended to new clientele groups under the initiative are unlikely to pose new risks much more challenging than in, say, consumer credit.

Recent Macro-economic Indicators

FX Reserve: Position of FX Reserve has improved in February, 2012 (USD 9.85 billion) from the previous month (USD 9.38 billion).


Taka-USD Exchange Rate: Taka has appreciated against USD from Taka 84.45 per USD in 31 January, 2012 to Taka 81.93 per USD in 20 February, 2012.

Remittance: During the first seven months of FY 12, remittance inflows have increased by 11.7 percent as compared with less than 1.0 percent during the same period of FY 11.

Exports and Imports: Exports receipts and import payments have grown by 14.3 and 16.9 percent respectively during July-January, FY 12.

Current Account Balance: CAB remains positive at USD 409.0 million during the H1 FY 12.

LC Opening and Settlement: LC Opening and settlement during H1 FY 12 grew by -5.82 and 16.1 percent respectively against 46.52 and 40.1 percent respectively during H1 FY 11.

Inflation: CPI inflation (12 month average) has increased from 10.71 percent in December 2011 to 10.91 percent in January 2012.


Overview of Recent Economic Trends in Bangladesh*

The annual ACU meeting is a unique platform for exchange of experiences and ideas on the opportunities and challenges in deepening ACU intraregional trade and investment relationships that keep arising from unfolding developments in the regional and global scene.

To begin with a brief overview of recent economic trends in Bangladesh, I am glad to be able to tell you that Bangladesh economy is getting ahead with firm footing on stable growth path, with real GDP growth averaging above six percent annually over the last decade. Poverty has been on steady decline by about two percentage points a year, coming down to 31 percent of the population by 2010. But of course along the way the economy faces occasional external and internal jolts impacting in various degrees on growth, inflation and exchange rate stability. Lagged effects from the global financial crisis and energy supply shortages played part in causing a short spell in mild growth slowdown, with real GDP growth coming down from 6.2 percent of FY08 to 5.7 & 6.1 percent respectively in FYs 09 & 10. However, economic activities rebounded sharply in FY11 as energy scarcities eased and export demand picked up; with 6.7 percent real GDP growth, nearly 42 percent growth both in exports & imports, and 28.4 percent expansion in domestic credit. The credit growth surge stoked up creep of CPI inflation, pushing it beyond comfort zone into double digits since October 2011. Bangladesh Bank's (BB's) monetary policies adopted a restraining stance in FY12 for orderly, smooth touchdown to trend levels from the FY11 credit and external trade surge; aimed at limiting domestic credit growth to 19 percent and bringing inflation down to single digit level by June 2012. Towards attaining these objectives, besides raising policy interest rates (BB's repo, reverse repo interest rates) by 100 basis points and restraining reserve money growth, interest rates caps on some types of lending imposed during the global financial crisis were done away with, freeing up lending and deposit interest rates.

These steps slowed down domestic credit growth and helped stabilize the exchange rate of Taka in a new equilibrium (Taka 81.83 per USD in March 2012 against Taka 72.78 per USD in March 2011), trimming off excess demand. Import

*41st ACU Board Meeting: Bangladesh Country Presentation, organized by Nepal Rastra Bank, Kathmandu, Nepal, 17 May 2012.


growth came down to 14.53 percent during July-Feb, of FY12 from 41.8 percent in the same period of FY11, export growth stood at 10.4 percent during July-March FY12 against 40.3 percent in the same period of FY11. Remittance inflows from workers abroad increased 10.3 percent during July-March in FY12, helping sustain the bop current account balance in positive. Decline in CPI inflation has been slower to show up than the decline in monetary growth, mainly due to repeated rounds of hikes in administered user prices of energy needed to ease fiscal subsidy burdens. Nevertheless, point to point CPI inflation at 10.10 percent in March 2012 was the lowest since the beginning of FY12.

To avert negative impact of the tightened monetary stance on GDP growth, BB is maintaining a deliberate pro-growth directional bias in credit policies. An ongoing comprehensive financial inclusion drive is working towards ensuring adequate credit flows to supply side activities including farm and non-farm productive pursuits of micro and small enterprises; while discouraging credit growth for conspicuous consumption and unproductive, speculative uses. Refinance support lines available from BB to banks against their lending to agriculture and SMEs are being funded by the government and external development partners. Flexibility of the market based exchange rate of Taka is helping preserve external sector competitiveness; exporters affected by demand weakness in advanced economies are making successful forays into newer markets in fast growing emerging economies. With growth supportive macroeconomic policies and a congenial, welcoming openness to foreign direct investments, Bangladesh economy looks well poised for attaining the expected near seven percent real GDP growth in FY12 and single digit inflation by June 2012; on track towards still faster growth over the medium term.

Bangladesh's trade with ACU member countries remained buoyant in 2011 despite an overall ACU intra-union trade settlement transactions on decline. According to ACU Secretariat Newsletters data, Credit (export receipt) and debit (import payment) transactions of Bangladesh with other ACU members increased 99.6 and 23.1 percent respectively in 2011 compared to 2010, although total ACU intra-union imports and exports registered a 29.5 percent decline. January-February 2012 transaction volumes were also on declining trend, both for Bangladesh and Union wide totals. These declining transaction trends may be transient, mainly reflecting the current demand slack in Western advanced economies. Of greater relevance for stable longer term regional growth is the share of ACU intraregional trade as percentage of total external trade of the region. This still remains slow changing and quite small, particularly for the larger ACU member countries; despite our regular lip service to strengthening of intra-union trade and investment cooperation in successive board meetings like this. Increasingly, the global community is looking up to our region as a key growth driver in the global economy; and we need to prepare our Union to play that role with optimal use of its potentials. Ideas on steps towards greater trade and investment cooperation mooted in past several Board meetings have been routinely passed on to technical committees that have tended to come up with suggestions largely in favor of continuing with status quo.

Let us instead make resolute efforts towards some real progress in deepening Union wide co-operation and integration on at least some directions that others


have already started adopting. This may interalia include broadening and up scaling of our ACU swap arrangement on lines similar to the bilateral swap arrangements between central banks in the ASEAN+3 Chiang Mai initiative; and reintroduction of settlement of intra Union trade transactions in member country currencies. India is reportedly adopting this approach in her trade with other BRICS countries; we can look into their exchange rate risk hedging arrangements to help drawing up hedging arrangements suitable for intra Union trade settlements in ACU currencies.

All ACU member central banks are also financial sector regulators. It should not, therefore, be too difficult for us in this forum to act concertedly towards expanding presence and engagement of banks and financial institutions of ACU member countries in each other's territories deepening trade and investment cooperation.


Socio-economic Development Goals*

Although socio-economic development indicators of Bangladesh are improving steadily, poverty incidence is still high and the country is some way behind her regional neighbors and the broader world in human development index. We cannot therefore afford to compromise the imperative of faster economic growth and inclusive social development with attempt at overambitious elitist environmental goals.

In the RIO+20 global dialogue for a post-2015 framework Bangladesh may consider advocating some variant of the so called 'hybrid approach'. We may suggest adoption of two separate sets of (a) Socio-economic development goals, and (b) 'Green Growth' Environmental Sustainability goals with the Socio-economic goals taking priority over Sustainability goals in low income developing economies like Bangladesh.

For low income developing countries the Socio-economic development goals will be the minimums to attain or exceed; but because of their severe constraints in resources and knowhow, the Sustainability goals will be benchmarks to make progress towards, but not necessarily to fully attain or surpass.

Developing low income economies should be demanding strongly for separate mechanism of transfer of resources and knowhow from developed economies in pursuit of the Sustainability goals. New 'carbon tax' and other levies on 'polluter pays' principle will have disproportionately high negative economic growth impact on low income economies; they will need to be protected by deferral of paying such taxes/levies, perhaps by a couple of decades or so.

Unlike in case of MDGs, some part of the onus of realizing the post-2015 sets of Socio-economic and Sustainability goals may be placed with the corporate private sector including the Trans National Corporations (TNCs), as their Social and Environmental obligations in the SR/CSR framework. To this end, the ICC and other global forums of private sector businesses may be drawn into global dialogues, eliciting concrete commitments of actions and resources. Attempts by developed country groups of abusing SR/CSR as trade restriction tools against

*Rio+20 Corporate Sustainability Forum, A Changing World: Business As usual, Rio de Janeiro, Brazil, 17 June 2012.


developing countries must however be vigorously resisted.

There are vast potential gains to be reaped in global stability and environmentally benign equitable inclusive growth from mainstreaming of Social Responsibility in corporate ethos and objectives of businesses. Modalities of engagement of corporate business sector in attainment of Socio-economic development and Environmental Sustainability goals remain to be worked out; proactive promotion and support in innovating environmentally sustainable, climate change adaptive production technologies in agriculture and manufacturing can figure importantly among those.

In Bangladesh, we at the central bank have spearheaded mainstreaming of CSR in financial sector corporates, for them in turn to influence non financial real sector corporates into embracing CSR obligations. We have also issued 'green banking' guidelines equipping banks to make financing decisions based on prior environmental appraisal of investment projects. Concessional refinance support has been introduced for banks against their financing of environmentally beneficial projects, including renewable energy (bio-fuel, solar etc.) generation, effluent treatment, and adoption of more energy efficient emission minimizing production techniques.

Poverty and Grassroots Entrepreneurship

Bangladesh has positioned herself in global community as a forward looking nation, with firm footprint on path of steady, accelerating growth and development towards rapid poverty elimination and eventual prosperity. Bangladesh has achieved fairly steep decline in poverty over the past two decades from 57.0 percent in the 1990s to 31.5 percent in 2011. According to the latest projections of GOB's Planning Commission, poverty will come down further to 26.4 percent in FY 2012-13. The dynamism of Bangladesh's developing economy has by now attracted notice and attention of global markets and development institutions, and is expected to touch the middle income country group per capita GNI threshold in the near term. Besides lowering income poverty, Bangladesh has made remarkable progress towards attaining the Millennium Development Goals (MDGs), particularly in the area of education and health.

This sharp decline in poverty in Bangladesh stems largely from buoyant employment growth in farm and non-farm micro and small enterprises at grassroots level, underpinned by steady GDP growth, averaging around 6.0 percent annually in real terms. Around 6 million micro and small and medium enterprises (SMEs) in Bangladesh accounting for 75 percent of the domestic economy now account for 90 percent of industrial employment in Bangladesh. Grassroots level entrepreneurship in newer areas of non-cereal agricultural farming including horticulture, floriculture, spices, oil seed and lentils are providing further new employment opportunities in rural areas. Credit facilities at subsidized interest rate of only 4.0 percent is available for production of maize, oil seeds, spices and lentils from Bangladesh Bank refinance line. The government and central bank in Bangladesh has been proactively promoting farm and non-farm micro and small enterprises in Bangladesh, with financing and marketing/technical support delivered through different agencies. Civil society


initiatives in the form of microfinance institutions and non-financial NGOs have also been active in these areas. As outcome of such initiatives, rural Bangladesh is now abuzz with output activities catering to export demands as well as buoyant domestic demand.

Central banks can play catalytic role in this reorientation of goals and objectives of financial institutions and markets towards socially responsible inclusive lending practices ensuring adequate credit flows to small businesses and other underserved or financially excluded economic sectors and population segments. At Bangladesh Bank (BB), we have taken this approach. Results thus far are very heartening. Deepening, widening financial inclusion has helped Bangladesh economy uphold domestic output and demand amid global economic slowdown. Rising real wages, particularly strongly for the rural workforce, evidence rise in employment. BB has initiated guiding Bangladesh's financial sector towards socially and environmentally responsible financing by sensitizing banks and financial institutions about their Corporate Social Responsibilities (CSR), with a guidance circular for mainstreaming of CSR obligations in their corporate goals and objectives. The financial sector has responded with warm enthusiasm in steadily increasing engagement in CSR initiatives.

The present government of Bangladesh in its Sixth Five Year Plan (FY 2011-15) and Perspective Plan (2010-21) stresses on promotion of inclusive economic and social growth offering equal advancement opportunities for all population segments. Accordingly Bangladesh Bank has been campaigning on financial inclusion offering basic financial services at the doorstep of all people and channeling adequate credit flows to the productive pursuits like agriculture, SME and renewable energy.

I am indeed happy to share with you some of the initiatives from the central bank towards promotions of SMEs and employment generation and accordingly, contributing to the poverty alleviation agenda of the government. Bangladesh Bank has undertaken a good number of programs to ensure adequate credit flows to the SME sector including formation of a Taka 7.0 billion fund with financial assistance from ADB, establishment of a 'SME and Special Programmes Department' dedicated to facilitate funds and promote entrepreneurship opportunities, organizing countrywide road-show to introduce SME products, creating linkages between bankers and customers, introducing policies and programs to promote institutional and financial opportunities for women entrepreneurs and so on. SMEs are benefitting from fast and secure payments and transfers now enabled by a modernized fully automated system for online clearing and settlement of paper based and electronic interbank payments and transfers. Mobile phone banking and e-commerce, and upgraded credit information bureau with online access are recent BB initiatives further facilitating financial transactions and business promotion of SMEs.

SME financing is a major thrust area of BB's ongoing financial inclusion campaign participated enthusiastically by all banks, on their own as well as in innovative partnerships with Micro Finance Institutions (MFIs) and mobile phone/smart card based IT platforms for cost effective service delivery. Besides our government, external development partners like ADB and JAICA have come forward in aiding the SME financing initiatives with refinance support lines for lending


banks. BB has been providing necessary regulatory support in developing this SME friendly refinancing platform where women entrepreneurs are getting preferential access.

In 2011, the banking sector of Bangladesh disbursed Taka 538.0 billion SME credit to 0.3 million small and medium entrepreneurs generating new employment for 0.24 million people. Of this, Taka 20.5 billion was disbursed to 16,697 women entrepreneurs. You will be happy to know that Bangladesh Bank has guided all the scheduled banks to sanction loans up to 0.25 million to a potential woman entrepreneur without asking for any collateral but only against a personal guarantee. Loans to small entrepreneurs increased by Taka 28.23 billion in 2011, 12.5 percent higher than that in 2010. Share of loans to small entrepreneurs is around 50.0 percent of the total SME credit. SME Loans in service and manufacturing sector increased by Taka 1.75 billion and 6.6 billion respectively in 2011 over 2010. Thousands of new entrepreneurs in agro-processing, poultry, and agricultural sector have emerged in rural Bangladesh with regulatory and financing support from the government and central bank.

Recently, an agreement has been signed between a commercial bank and a development organization to extend credit facilities to a project titled 'Infolady' with the refinance line of Taka 100.0 million from Bangladesh Bank. 'Infolady' is a grassroots service delivery system under which a woman equipped with modern technology such as laptop, internet, mobile phone, camera etc provides door to door services like filling up of application forms, providing information on government, financial and health services, using internet and so on. The infoladies helped around 50,000 people directly or indirectly and definitely it is a win-win initiative.

Public authorities, banks, business chambers and civil society support groups need to engage effectively with the SMEs in understanding their needs and prospects. In our financial inclusion drive we have seen that this is easier with targeting SMEs clustered in specific areas of concentration than with SMEs in widely dispersed locations. A number of SME clusters have already been developed in various parts of the country, particularly focused on home based textiles, light engineering, renewable energy and agro processing SMEs. Formation of SME business associations for collective voicing of needs, mutual cooperation networking, and linking with other value chain partners become easier with such clustering; extending of training/technical assistance, marketing support etc. likewise becomes easier.

We will continue our financial inclusion drive at the central bank in promotion of inclusive economic growth and encouraging socially responsible business practices in Bangladesh. I believe, thousands of new entrepreneurs will emerge in the days ahead and will contribute significantly to poverty alleviation in Bangladesh.


Vulnerabilities of Developing Asia Pacific*

Bangladesh and other low income DAP countries need continuing support in growth and poverty eradication efforts. Protectionist sentiments have tended to heighten in trade and labor markets of advanced economies in growth slowdown since the global financial crisis, impeding export growth of developing economies. IMF's global policy surveillance needs to remain proactive in countering these trends; to protect and further widen openness of advanced economy markets to goods and services from the DAP.

Countries in South Asia and the broader DAP region have in recent past concluded several new agreements for freer bilateral and regional trade. The DAP region can benefit from IMF support in activating trade under these initiatives. Despite low levels of policy interest rates in and outside the region, access to trade financing has remained relatively more constrained and expensive following the global crisis. IMF support for structuring of suitable guarantee/refinance arrangements against trade finance for DAP countries may prove useful in promoting their exports.

Price volatility in global commodity markets remain a major vulnerability for DAP. Sudden sharp food price spikes heighten risk of hunger particularly for the urban poor; food grain growers suffer in ensuing sharp price decline as supplies improve. Commodity price stability beneficial for both producers and consumers can be usefully supported by maintaining modest publicly owned buffer stocks as cushion. Low income DAP countries building up such food grain buffer stocks may usefully be assisted in this by budget support financing from IMF.

In recent years speculative position taking by financial institutions in commodity futures markets has tended to exacerbate price volatility; IMF's global policy surveillance may proactively pursue adoption of global discipline barring speculative position taking in commodity futures by financial institutions or other entities with no stake in supply chains of the commodities concerned.

* Presented in a special event for exchanging views on continuing vulnerabilities of DAP Countries to Global Shocks and the role of IMF in supporting the region's growth, organized in the IMF-World Bank Annual Meetings 2012 held in Tokyo in October 2012.


Upholding domestic demand driven component of output growth in low income member economies would require IMF financing support agreements to avoid imposing conditions hurting well being of the poor; instead keeping the brunt of adjustment burden on the better off. To this end, IMF assistance programs may also include financing for member country's own targeted initiatives supporting output activities of farm and non- farm small businesses including start ups.

Low income DAP countries also need IMF support in putting in place sustainable, affordable social safety nets for the poor; in appropriately structured retirement /pension savings schemes.

IMF can increase its presence in local field offices for first hand appraisal of the needs and concerns of DAP countries facing shocks from turbulences in the global economy. The representatives are very effective and generally so are the TA support. But still compared to other partners the IMF is very HQ centric in staffing and this could be rebalanced.


MDG Attainment and Post-2015 Development Agenda Setting in South Asia*

I am happy to see Bangladesh chosen as venue for this South Asian sub-regional workshop aimed at identifying the key South Asian priorities in accelerating attainment of MDGs and in charting the post-2015 sustainable development agenda.

Bangladesh has been a social laboratory in innovating many creative options for achieving MDGs. Over the past few years Bangladesh's government and civil society have engaged extensively in participative consultations towards charting priorities and progress paths of rapid poverty eradication with broad based inclusive sustainable social and economic progress, by 2015 and beyond. Outputs from these consultations went into drafting of the government's Five Year Plan and Perspective Plan spanning MDG years up to 2015 and beyond. Bangladesh is on track for attaining or exceeding poverty reduction and most other national level MDG goals, with steady trend of inclusive economic growth supported interalia by a continuing pronounced pro-poor stance in social sector public expenditure, as also by the social responsibility driven financial inclusion and green banking campaign orchestrated by Bangladesh Bank (BB), the country's central bank in its somewhat unorthodox developmental role. In these developmental role initiatives BB is upholding financing flows to output and employment generating SMEs, and to green initiatives like renewable (solar/biomass based) energy generation, effluent treatment, adoption of new emission minimizing output practices and so forth; besides promoting adoption of energy efficient, emission minimizing in-house practices and processes in banks and financial institutions themselves. Both Rio+20 and COP18 conferences expressed appreciation for BB's green banking initiatives, I happened to be one of the few central bank Governors attending these conferences.

Between now and 2015, Bangladesh authorities will need to focus on hastening action on the slower progress areas of MDG attainment; particularly on universal health care/coverage and non communicable diseases in the unfinished health agenda. For years further forward beyond 2015 there is broad social consensus for fastest feasible total eradication of poverty and deprivation being the overarching priority for Bangladesh's post 2015 sustainable

*Sub-Regional workshop on MGD Attainment, 9 February 2013.


development agenda; in a peaceful harmonious local and global environment. Harnessing the creative energies of broad masses by opening up equitable access to education and training on knowledge and skills needed in the twenty first century global labor market will be a keystone in our development strategy.

The UN MDGs provided a useful unifying campaign theme and framework for concerted thrust of global development cooperation in combating poverty, deprivation and environmental degradation. Not unusually for such broad-canvas initiatives, engagement levels and outcomes have in some respects fallen short of expectations; notably interalia in support levels from the global community for the development initiatives, and in weaknesses of global governance in safeguarding peace and global financial stability. At the country level, reform initiatives related to MDG attainment have often tended to be bogged down by resistance from the beneficiaries of status quo. Activating coalitions of likely beneficiaries of the planned reforms may perhaps be a possible countering strategy against vested interests in status quo. Success in fast tracking poverty eradication and sustainable development will hinge importantly on strong broad based civil society engagement at country level, and on heightened international support and cooperation at regional and global levels.

I presume that the sessions of this three day South Asian sub-regional workshop will glean lessons from the regional and country experiences and from the implementation pitfalls for UN MDGs, towards suggesting priorities and appropriate implementation strategies for post 2015 SDGs (sustainable development goals). I expect that interactive deliberations of the participating South Asian development experts and policy practitioners with erudite resource persons from the UN system and elsewhere would make the workshop sessions rewarding experience and fertile ground for germination of innovative ideas.


International Trade Fraud: Detection & Prevention*

I am delighted to join you at this Interactive session on 'International Trade Fraud: Detection & Prevention.' I would like to thank the organizers,particularly ICC Bangladesh President Mr. Mahbubur Rahman for arranging the event and inviting me to it. I will certainly be looking forward to the recommendations of this workshop on an issue that has been under intense public attention in the backdrop of recent incidences of Internal and external fraud at State owned Commercial Banks (SCBs) and Private Commercial Banks (PCBs). Let me now share with you glimpses on how Bangladesh Bank (BB) has acted in responses to these episode of fraudulent incidences in banks.

Besides thoroughgoing investigations by the banks themselves and by BB's supervisory departments, BB has got a Material Loss Review (MLR) conducted covering the recent incidences of internal and external fraud at SCBs and PCBs. The review revealed clear negligence in the affected banks in respect of mandatory control and bona fide verification routines like Know Your Customer (KYC), Credit Risk Grading (CRG), Anti Money Laundering Provisions and so forth; demonstrating major lapses and deficiencies in their credit administration, risk management and internal control and compliance functions. Attention of the boards of directors and senior managements on control and compliance procedures were superficial and merely formal rather than substantive; and such laxity in corporate governance and internal controls allowed off balance sheet exposures in the form of Inland Bills Purchased(IBPs), largely fraudulent, grow very rapidly to extremely high levels in a few branches, ending up in huge volumes of bad debts and material losses in asset books of the banks concerned.

In supervisory response to these episodes, BB has considerably tightened its onsite and offsite vigilance on risk management, corporate governance, internal controls and internal audit functions in banks. Pursuant to BB reports on board level lapses in mandatory control and oversight functions, GOB has reconstituted the boards of directors in SCBs with persons meeting the fit and proper eligibility criteria. The Banking Division of Finance Ministry and BB Jointly held a day-long

*ICCB interactive session on International Trade Fraud: Detection & Prevention 13 February, MCCI Conference Hall, Dhaka.


workshop initiating and familiarizing the newly appointed board members with their roles, responsibilities and accountabilities. BB will be happy to see and support similar initiation/refresher-familiarization workshops arranged for PCB board members by the BAB. Here I would like to take the opportunity of strongly advising that the banks must always ensure strict adherence with relevant laws (Bank Companies Act 1991, Negotiable Instruments Act and so forth), and

guidelines (on management of core risks, on board's audit committee's oversight of internal audit and internal controls, etc.) ensuring transparency and accountability. BB has recently imposed requirement of filing of quarterly self assessment of internal audit and internal control procedures and practices in banks, signed jointly by the board Audit Committee Chairperson and the CEO, for BB review. In all the recent meetings at BB with senior managements of banks and with BAB, ABB office bearers, the need to have in place good corporate governance and the need to prevent insider abuse, manipulation of records and other malpractices are being emphasized categorically. I believe that if these disciplines are adhered to in right earnest, banks will succeed in keeping themselves largely free of the stigma of insider abuses, fraudulence and losses attendant thereto.

As part of its shored up supervisory vigilance on fraud risk management internal control and fraud prevention practices in banks, BB has lately been putting in place an on-line electronic 'supervision dashboard' that brings together a range of live transactions data from banks that can provide warning signs of potentially fraudulent transactions. The foreign exchange transactions modules of the supervision dashboard are already operational and in use by BB and the banks.

It is my hope that this interactive session will help banks further in minimizing fraud risks in domestic and international trade related transactions. I would therefore urge all participants to engage in open and frank discussion with a view to identifying and addressing the weaknesses in internal controls thus reducing risk from and vulnerability to internal and external fraud.


Boosting Sub-Regional Development*

Demand weaknesses from growth slowdown in Western traditional markets require us to look for compensating growth opportunities from increased trade and investment within our own sub-region. South Asian economies have accordingly acted to lower tariff and non tariff barriers to intraregional trade and investment flows as much as feasible in specific country contexts. Additionally, Bangladesh opted also to open up her inland transport routes to commodity transit traffic of neighboring India, Nepal and Bhutan. India's allowing of duty free entry of specified volumes of Bangladeshi apparels has enabled significant rise in Bangladesh's exports to India, albeit from a very low base. Bangladeshi apparels manufacturing uses much of Indian inputs like fiber, yarn or fabrics; therefore increase in Bangladesh's apparels exports to India also means increase in Indian inputs exports to Bangladesh. Such mutual benefit can magnify further by Indian investors setting up factories in Bangladesh to produce output for markets in India and elsewhere; lower wage costs and zero tariff access in major markets for exports of Bangladesh as a low income country provides substantial competitive edge. Besides, there is also the demand of the large Bangladesh population itself to cater to.

Besides manufacturing, major opportunities for foreign investors in Bangladesh exist also in the infrastructure sector, including gas and electricity generation, toll bridges, hotels and other tourism facilities, tertiary health care hospitals, developing land port, seaport, airport facilities and so forth. Software and IT enabled services are yet another new promising area for foreign investors in Bangladesh. Besides the fast expanding domestic market for these services, exports are also rising sharply, in soaring growth trend of about fifty percent y-o-y. Currently around eighty thousand science, technology and engineering graduates are entering the job market every year from our universities, and around seventy thousand freelancers are active in online export of IT services along with the organized formal exporting firms. Initiatives for realization of the government's Digital Bangladesh vision have brought about major improvements in high speed broadband internal and external connectivity, automation of countrywide interbank clearing and settlement, interlinking diverse settlement

*Boosting Sub-Regional Development arranged by Confederation of Indian Industry 3 May 2013, New Delhi, India.


platforms in a National Payments Switch and so forth have given massive boost to the country's capabilities in IT enabled services, attracting external attention. Samsung, one of the global IT products giants, has already set up a product R&D establishment in Bangladesh. Indian software and IT service firms facing soaring wage costs domestically would now find Bangladesh a very attractive investment destination.

Among the South Asian countries India with her huge foreign exchange reserves and large pool of tech savvy entrepreneurs active in both developing and developed economies has by far the highest capacity of investing in her sub-regional neighbors. Despite this, Indian FDI inflows into Bangladesh remain minuscule. According to our FDI Survey data, annual inflows since year 2000 remained well under USD 10 million in most years, spiked at USD 43 million in 2010, nearly halving thereafter. Given that East Asian investors are flocking in to relocate manufacturing facilities in Bangladesh from costlier locations, Indian investors may be missing out on significant opportunities. I am, however, encouraged by the recent interest of Indian entrepreneurs evidenced by this interactive session arranged by CII. I also remember having received at Bangladesh Bank two large delegations of Indian business leaders over the recent past months.

Let me now dwell briefly on the stable macro environment and welcoming FDI policy regime of Bangladesh. The economy has maintained sustained real GDP growth trend averaging over six percent annually for more than a decade now. This growth momentum remains largely unimpaired even in the current global growth slowdown, due to continuing export growth and robust domestic demand upheld by rapid poverty decline from inclusiveness of economic growth. Inflation, already in single digit, is on declining trend. Export receipts and workers' remittance inflows are swelling foreign exchange reserves and pushing up Taka on appreciation trend. Fiscal deficits remain well contained, in low single digits as percent of GDP. Growth trends sustained by Bangladesh's inclusive strategy and the ongoing structural reforms in the fiscal and financial sectors for further consolidation of macroeconomic stability and soundness have led Moody's and Standard & Poor to maintaining Ba3 and BB- ratings respectively for four consecutive years now, both with stable outlook.

In this stable and congenial environment foreign investors can set up wholly foreign owned or joint venture industrial undertakings in all sectors excepting the reserve sectors of armaments, nuclear power, security printing and minting and forestry, acquiring only a registration with the Board of Investment. Current account convertibility of Taka assures foreign investors the same access to local financial markets as local investors for current transaction related Taka and foreign exchange needs. Just as local investors, they can also access term loans from abroad with BOI approval accorded by Like local investors, foreign investors have to sell their foreign currency export receipts to banks, but can retain up to fifty percent (depending on local value added content) in foreign currency accounts for business related needs. Wholly foreign owned units in Export Processing Zones are exempt from the export receipts surrender requirement, but they cannot access local financial markets for financing.


Post tax profits/dividends of foreign investments are freely repatriable in foreign exchange; as also are disinvesment proceeds including capital gains. Tax holidays allowed by government from time to time for investments in various priority sectors apply equally for both domestic and foreign investments . (As of now earnings from IT services are exempt from income tax up to June 2015). Bangladesh's FDI policy regime is among the most liberal ones in South Asia; both Bangladesh Bank and Bangladesh government remain responsive in promptly addressing new issues as they arise. In a recent discussion at BB with a visiting large delegation of Indian investors we promised some new easing of the office opening permission process for foreign businesses, and some enhancement of the remittable portion of current salaries of working foreign nationals. Both have by now been done. Offices of new foreign businesses can now start functioning immediately upon submission of fully documented application for formal permission in terms of the FER Act, and seventy-five percent of current salaries of expatriate employees are now freely remittable abroad instead of the earlier fifty percent.


*Paper presented at South Asian Institute, Harvard University on 10 October 2013

Socially Responsible Financing for Enhancing Economic Stability*

The global financial crisis has brought economic and financial stability to the forefront of priorities of governments, economic managers and financial regulators at national, regional and global levels. New coalitions of national governments like the G24 have engaged the Basle based global financial supervision standard setters in drawing up new macro-prudential supervisory guidelines, besides revamping the pre-crisis micro-prudential guidelines.

A more demanding capital adequacy regime; new risk management parameters on liquidity, leverage etc.; new stress testing, lender of last resort and bank resolution frameworks and so forth are at various stages of impact study, implementation, and further refinement. Major advanced economy central banks have taken recourse to 'quantitative easing' or deliberate liquidity expansion to rev up sputtering output growth; prolonging rather than restraining global liquidity expansion out of line with global real output growth, which was the key factor behind the global financial crisis.

The regulatory reform initiatives are all desirable and welcome. But one key lesson from the last global financial crisis is that compliance with regulatory prescriptions become lax in good times. Risk buildups precipitating the global crisis came about not so much from gaps and omissions in regulatory frameworks as from neglect of regulatory compliance in race for higher gains from imprudent risk taking with boom time surfeit of ultra cheap liquidity. Strengthened regulatory frameworks alone are unlikely to be enough to fend off future crises from imprudent risk buildup once the global economy is back on upturn; motivations of financial institutions and markets also need reorientation by ingraining of socially responsible business ethos; towards inclusive, sustainability supportive financing and away from irresponsible risk taking for quick gains. Until recently largely ignored by advanced economies and global supervisory standard setters, socially responsible financing has been steadily gaining ground in developing economies; and is also growing in sidelines in the advanced


economies facing financial instability driven financial exclusion of small businesses. Cooperation and networking among businesses and regulators for mainstreaming of social responsibility in financial and nonfinancial businesses is flourishing in under umbrellas of the UN global Compact (UNGC), the global Alliance for Financial Inclusion (AFI) and many other local and regional forums. The Basle based standard setters, at the behest of G24, have also lately begun paying attention to issues of costs and instability risks from financial exclusion. In South Asia, the regional central banks are using their SAARC FINANCE forum for mutual learning through networking and periodical seminars sharing experiences and approaches in inclusive financing.

Bangladesh Bank and other South Asian central banks are among the early recognizers and utilizers of the stability enhancing potentials of socially responsible financing; which has helped uphold domestic output and domestic demand in South Asia amid weakened export demand during and following the global financial crisis. Inclusion initiatives channeling financing for under-served and excluded micro and small scale productive undertakings and 'green' projects adopting energy efficient and environmentally benign output processes and practices are adding incremental output in the real economy on the supply side; while also bringing up incremental demand from newly created employment and income; preserving real sector stability. In the financial sector, the numerous diverse small-sized financing in the inclusion initiatives constitute a new asset base entailing lower aggregate credit risk than from large loan exposures to a few large borrowers; at the same time the new client base of numerous small borrowers constitute on aggregate a substantial base of new deposits that are more stable than large deposits from a small number of big depositors; enhancing financial sector stability.

Socially responsible inclusive financing initiatives can thus enhance both real and financial sector stability synergistically, as evidenced in broad stability of growth and poverty decline in South Asia, especially in its rural regions, amid lingering global growth slowdown.

The recent growth jitteriness in India from risks of QE pullback or 'tapering' in advanced economies is in the well developed, well served urban segment of the Indian economy rather than in the rural segment focused by the inclusion initiatives. The stability enhancing impact of ongoing inclusive financing initiatives in the underserved rural segment would indeed helpfully act as cushion against instability ripples in the urban segment; a prospect not missing notice of the incoming new Reserve Bank Governor, as evident from his underscoring of inclusion initiatives in his opening policy priority remarks.

Inclusive financing initiatives for client segments in dispersed, remote locations are often not immediate business cases; and affordable interim cross-subsidization from other incomes (as business promotion and social responsibility expenditures) till attainment of viability is also often not enough to close the cost gap. Governments and central banks in South Asia have therefore stepped in to help out with various support measures. They have interalia hastened modernization of the ICT infrastructure for financial services, enabling introduction of cost-efficient off-branch smart card/mobile phone based service delivery. Low cost funding/refinancing lines for initiatives in some specific sectors


are also compensating for the cost disadvantages to some extent.

The range of financial service providers engaging in socially responsible financing initiatives in South Asia and the range of approaches they are trying out are impressively diverse; making the region a vibrantly active social experimentation laboratory road testing the various approaches, to seek out those that are optimal in impact and viability. A brief country by country overview of ongoing socially responsible financing initiatives in the region will be useful here in identifying the major threads of thrusts and approaches. I must of course begin by apologizing in advance for possible inadequacy and factual errors in my depiction of initiatives in the countries other than my own, because of insufficient familiarity.

In Bangladesh, socially responsible financing began outside mainstream banking as microfinance movement of non-government microfinance institutions in the post-liberation nineteen hundred seventies, the leading ones among them blossoming over the decades into globally active, globally renowned entities. In the formal banking sector nationalized after liberation, the modest sums of social priority driven financing were directed rather than spontaneous. Directed lending became ineffectual with reappearance of private sector in the eighties, and was given up in early nineteen nineties.

The social consensus for inclusive growth espoused in Bangladesh's development vision and strategies calls for proactive socially responsible financing promotion role of the country's formal financial sector. Bangladesh Bank (BB), the central bank and financial sector supervisor has accordingly taken up guiding and supportive role in mainstreaming socially responsible financing; beginning with setting motivations right by ingraining social responsibility in institutional ethos and strategic goals and objectives, including in BB's own; followed by the still ongoing countrywide inclusive financing promotion campaign, taking on board all banks and financial institutions, private and public, local and foreign owned. The campaign is pursuing three main thrusts of socially responsible financing, viz., in (i) small holder and sharecropper agriculture, (ii) micro, small and medium scale productive rural and urban enterprises (MSMEs), and (iii) renewable energy generation, effluent treatment, and other projects of adoption of new energy efficient, GHG emission reducing output practices. Some extent of deliberate pro-women gender bias has been imparted in specific action programs in all these thrust areas.

Several enabling and facilitating measures have accompanied these socially responsible financing promotion thrusts:

BB led modernization of the country's payment system and financial services ICT infrastructure has enabled rapid expansion of mobile phone/smart card based off-branch financial service delivery. A donor funded Challenge Fund extending partial grant support for costs of developing mobile phone/smart card based financial service delivery modes helped significantly. Beginning with fund transfers including inward remittances from workers abroad, use of this off branch service delivery mode is now expanding to deposit taking, loan disbursement and loan recovery.

In the bank led model opted for by BB in promoting mobile phone based and


other cost efficient off branch financial service delivery modes, banks employ locally active area agents, including Micro Finance Institutions (MFIs) licensed by MRA, for service delivery to clients in the local area; with responsibility for all KYC and other AML-CFT due diligence routines on the agents. Client transactions are subject to KYC drills of varying level of rigor proportionate with transaction size and frequency.

BB requires all banks, state-owned and private sector owned, local and foreign, to maintain at least 2.5 percent of total assets in agricultural financing. Foreign owned banks are using MFIs as agents in their agricultural and SME financing. BB itself has recently been using a renowned big MFI in a special scheme of channeling financing for sharecroppers, funding it against bank guarantee for on lending to the target group which includes female borrowers. Bank branch expansion into under-served rural areas is also being encouraged, alongside a campaign of opening no-frills bank accounts for poor sharecroppers, day laborers and others in the lowest income brackets, with deposits from as low as Taka ten (equivalent of about twelve US cents). The campaign has been spectacularly successful, with well over thirteen million new bank accounts already opened, a major milestone in financial inclusion.

Besides the intended use for receipt of social safety net allowances and farming input subsidies, other payment, receipt and savings transactions are also increasing in these accounts.

Available windows compensating for cost disadvantages in promoting inclusive financing include a donor supported low cost BB refinance line against their SME financing, subject to at least fifteen percent of these having been for women entrepreneurs. A government funded interest subsidy is available to banks from BB against low cost financing for growing nontraditional new agricultural produces like spices, oilseeds, pulses etc. State owned agricultural banks get occasional refinance from BB against government guarantees.

Proactive promotion of agricultural financing is already paying off handsomely, drastically lowering import needs, one factor behind the recent rapid rise of Bangladesh's foreign exchange reserves.

For MFIs engaged in microfinance supporting output activities of microenterprises, moderately priced fund support is available from PKSF, a government sponsored wholesale financier for promotion of rural employment. For efficiency enhancement in MFI lending, a donor supported project of setting up a separate credit information bureau for credit information of MFI clientele segments is in progress.

A refinance line funded by BB and a development partner is available against financing of renewable energy, effluent treatment and other environmentally benign 'green' projects; already spawning substantial progress in solar and biomass based renewable energy generation, effluent treatment, use of new energy efficient kilns in brick making and so forth.

In India, both government and central bank are likewise engaging intensively with financial service providers for promotion of socially responsible inclusive financing.


The Indian government constituted a Committee on financial inclusion, and based on its recommendations, set up a Financial Inclusion Fund and a Financial Inclusion Technology Fund to support costs of development of promotional interventions; through NABARD, the state owned bank for agricultural and rural development.

The RBI has its Financial Inclusion Advisory Committee with members from RBI board directors, market intermediaries, experts and civil society for deliberations and suggestions on developing viable, sustainable banking service delivery models to provide accessible, affordable financial services for population segments outside the banking network; as also on creating an appropriate regulatory framework for financial inclusion and stability to move together.

To uphold and promote socially responsible inclusive financing RBI continues use priority sector lending target setting for banks in terms of percentage of total net lending, including foreign banks with more than ten branches. The priority sectors include agriculture and weaker sections of population, education, housing, export financing. From 2010, RBI is requiring banks to draw up their middle term (3-yr) financial inclusion action plans, guiding and facilitating their action agenda of both branch expansion based and ICT based off-branch service delivery in an agent banking model through Business Correspondents (BCs).

Broad approaches and thrusts of India's inclusive financing promotion initiatives are not far unlike those of Bangladesh, except in respect of agent banking and channeling support measures for MFIs. In Bangladesh the choice of and responsibility for KYC and other AML CFT due diligence drills on area agents for off-branch service delivery rests with banks themselves; they have to select agents carefully and maintain close watch on their activities, as BB will hold the banks responsible any aberrant dealings of their appointed agents. In India, apparently banks can appoint agents only from list of 'Business Correspondents' prequalified, preselected by RBI itself. For MFIs in Bangladesh, MRA is for some years now the statutory authority for regulatory oversight, with PKSF extending some wholesale fund support lines. In India, regulatory and support interventions for MFIs continue to rest with NABARD, the state owned bank for agricultural and rural development.

In Pakistan, agriculture and SMEs are the main thrust areas of central bank's (SBP's) interventions promoting socially responsible financing, with significant role for SBP licensed formal Micro Finance Banks (MFBs) and the still largely self regulated MFIs, alongside mainstream banks.

A large number of bank branches in Pakistan are 'agriculture designated' (3700 branches of 21 banks, as of end 2011), focused on agriculture credit and other financial service needs of farmers. SBP's Financial Inclusion Program has put in place support measures for boosting SME lending, including a credit guarantee scheme for small and rural enterprises, and SME cluster surveys & sub-sector studies. Work is going on for establishing an office registering charges on moveable assets, to facilitate collateralization of loans to SMEs and small farmers.

Both MFIs and MFBs in Pakistan are active in microfinance, the MFIs can access wholesale funding from Pakistan Poverty Alleviation Fund (PPFAF). A


microfinance-exclusive Credit Information Bureau is in place to help microfinance providers in making better informed lending decisions; and as for SME lending, a Microfinance Credit Guarantee Facility is also in place to mitigate microfinance lending risks. SBP has also taken up initiative for promoting housing finance, including drafting of housing finance prudential regulations, housing finance guidelines, and facilitating establishment of a Mortgage Refinance Company with government's equity participation.

SBP's branchless banking regulations encourage banks to develop alternative service delivery channels, especially using mobile phone technology; its usage is expanding rapidly. Unlike BB's choice of on bank led model for mobile phone banking in Bangladesh, SBP's stance on this point seems to be one of neutral indifference.

In Nepal, the government and the Nepal Rastra Bank (NRB, the central bank) are both engaged in promotion of inclusive financing, as elsewhere in South Asia. NRB and the government's Micro-Enterprise Development Program (MEDP) have pooled together resources for channeling credit to productive micro-enterprises from a Rural Self-Reliance Fund (RSRF), through cooperatives and non government MFIs.

NRB under its financial inclusion program encourages opening of new branches by banks and financial institutions in the under-served geographically remote areas, offering incentives and relaxations in requirements. NRB also sets target levels of lending to be maintained by banks and financial institutions in specified priority sectors. At least five percent of total loans of a commercial bank, development bank or financial institution have to be in Deprived Sector

lending, disbursed directly or through MFIs. For commercial banks, at least another twelve percent of total loans have to be in the agriculture and energy sectors.

NRB makes available refinance lines at sector specific concessional rates against the priority sector lending by banks and financial institutions, subject to the lending rates charged from clients also being within prescribed ceilings.

In Sri Lanka, inclusiveness of financing is arguably already the best in South Asia both in coverage and depth, attained through concerted, collective effort of the central bank, market participants and other stakeholders. The microfinance sector in Sri Lanka is considered to have attained greater community orientation than elsewhere in the region. Nonetheless, CBSL, the central bank remains proactive in identifying and addressing new needs as they emerge with evolving circumstances. On behalf of the government, CBSL is implementing several donor funded and government funded programs of lending through participating financial institutions in key economic sectors, including agriculture, fisheries and livestock, SMEs and microfinance.

To summarize, we see both commonality and diversity of approaches in South Asian initiative for promoting socially responsible inclusive financing, arising from similarities and differences in country circumstances and stages of financial market development. The near term priority on the way forward would be to bring the ongoing initiatives to successful completion and to ensure


sustainability with quickest possible attainment of viability by reaping all possible efficiency gains. Over the medium and longer term, new challenges to inclusiveness of financing in South Asia will be from future global financial instability, vulnerability to which will increase with increasing external openness needed for attaining the region's growth aspirations. As mentioned at the outset, one key factor behind the last global financial crisis, viz., unbridled global liquidity expansion out of line with real output growth remains unaddressed. Rather than attempting any meaningful reform in global monetary order towards tethering global liquidity expansion to real output growth, advanced economies are deliberately pumping in liquidity in efforts of shoring up flagging growth. Successfully ingrained socially responsible ethos will keep financial institutions and markets in South Asia well immunized against shocks from future global instabilities; keeping them motivated in inclusive financing and away from irresponsible speculative risk taking. South Asian central banks are usefully networking for mutual learning from each other's experiences for their agenda ahead.

Perspectives from South Asia focused forums of academics like this one at Harvard will also be valuable and welcome inputs in charting the path ahead for steady enhancement of South Asia's contribution to global prosperity and stability.


*Bangladesh Bank Governor Dr. Atiur Rahman attended the Executive Session of Global Compact Leaders Summit of United Nations Global Compact as a distinguished speaker at the session on "Local Sustainability Movements" held at Grand Hyatt New York on the 20 September 2013. This session is designed to help companies, governments and other stakeholders to identify ways in which local sustainability movements can mobilize and coordinate all actors in society with an interest and influence on sustainability to deliver a scaled impact on development. Governor Rahman along with Jorge Soto, Sustainable Development Director, Braskem SA, Dr. Anthony Mothae Maruping, Commissioner for Economic Affairs, African Union and Matthew Tukaki, Chair, Global Compact Networks Advisory Committee were the selected distinguished speakers at the session which was facilitated by Jo Mackness, Executive Director, Centre for Responsible Business, University of California Berkeley-Haas School of Business.

Adopting Global Development Goals*

I am grateful to UNGC for the invitation to brief you, about how we in Bangladesh have adopted the global development goals in our strategies and action programs at the national level.

Concerted efforts, aided by sustained stable spell of real GDP growth at above six percent annual average for more than a decade, have already enabled Bangladesh to attain a number of key MDG targets like halving headcount poverty and depth of poverty, gender parity in primary and secondary education enrollment, immunization coverage, infant mortality reduction etc. well ahead of the 2015 timeline. While the challenges of the unfinished agenda on the remaining MDGs are also not trivial, Bangladesh economy is now well poised on an inclusive growth path with sound macroeconomic fundamentals like single digit inflation, moderate fiscal deficit, and domestic currency stability underpinned by positive bop current account balance. Our socio economic advancements have on many counts outpaced those of our higher income neighbors hosting much higher levels of FDI inflows; arousing interest of development practitioners about the factors behind the better development performance.

In my view the single most important factor behind our superior socioeconomic growth performance is our inclusive, participative process of setting and implementing growth objectives and strategies, based on a social consensus for equitable advancement opportunities for all societal segments. This social consensus driven process has internalized the MDGs and other global development goals in our national goals and strategies. The social consensus for


equitable growth and development has emerged from nationwide civil society activism, particularly over the post liberation decades; interalia pioneering the microfinance movement by now embraced globally.

More than 2200 non government Civil Society Organizations (CSOs) active countrywide at local and national levels are advocating and promoting every dimension and facet of the diverse social, economic and environmental concerns of all occupational, generational, ethnic and gender groups; shaping public opinion and public policies into an inclusive growth orientation. Accordingly the global MDGs for 2015 found ready acceptance and internalization in our government's Vision 2021 and sixth five year plan (2011-2015) drawn up after rounds of consultations at local, regional and national level with the broad spectrum of all occupational and stakeholder groups including farmers, laborers, ethnic minorities, think tanks, business chambers, CSOs, external development partners, and so forth. Also for the new post 2015 Sustainable Development Agenda, our Government's proposals are drawn up from fresh rounds of in-depth multi stakeholder consultations. The rights-based, inclusive, equitable and people-centered proposals seek the 'unleashing of human potentials for sustainable development' embracing all tiers of stakeholders as the principal objective.

The social consensus for equitable growth has kept public expenditure of our successive governments consistently on a pronounced pro-poor bias, with large (around a third of total) allocations for health, education, and social safety nets targeting the less well off. Further, this social consensus has also fostered private sector provision of self financed healthcare and education for the better off, leaving more of the limited public resources for the less well off.

While multi level stakeholder engagement in designing of development plans and projects is by now fairly well established in Bangladesh, local level stakeholder engagement in the implementation phase is not as yet wide spread. Ongoing digitization of administrative processes and services (like land holding and transfer records registry, disbursements of farming subsidies, social safety net payments etc.) are enhancing resource use efficiency by preventing leakages. Similar efficiency gains in development project implementation can be expected from some oversight role for local level stakeholders, with clearly defined accountabilities.

Bangladesh Bank the country's central bank, is proactively supporting the government's inclusive, sustainable growth pursuits, spearheading financial inclusion and green banking towards ingraining socially responsible financing practices. This approach has already proven its worth by helping uphold stability and growth of the economy during and following the global financial crisis; SMEs and other small borrowers suffered no credit crunch in Bangladesh unlike in developed Western financial markets.

We have no room here for details of our initiatives, let me just mention that with BB guidance, socially responsible corporate ethos and objectives have by now been embraced by the entire financial sector in Bangladesh. The sector is steadily expanding engagements in financing of on and off-farm SMEs and environmentally beneficial 'green' initiatives; environmental impact assessment


is a routine part of appraisal for financing decisions. The new initiatives are spawning innovations like new cost effective off branch financial service delivery through microfinance institutions and other local agents, using mobile phone/smart card based platforms. Modest refinance support lines from BB, mostly development partner funded, are kept within monetary growth envelop of a cautious monetary policy stance. SMEs supported by inclusive financing generate incremental output, matching incremental demand for the output come from the incremental new employment and income, maintaining real sector balance and stability. The new inclusive financing diversifies the asset base of the financial sector; while small savings of the new client base add up to substantial bases of stable deposits and enhancing financial sector stability.

Commitment and activism for sustainable inclusive socioeconomic development has not been lacking in non-financial businesses either. Almost all of them are in direct or indirect engagements in various dimensions of community development initiatives, and they are transforming their internal practices and processes into more energy efficient, environment friendlier ones. Their new investment initiatives are taking due advantage of new opportunity spaces opened up by the environmental and inclusivity concerns. Civil society elite in Bangladesh has recently teamed up in launching an advocacy campaign for mainstreaming sustainable, socially responsible business; not unlike what we at BB launched some years ago in the financial sector. The UNGC Local Network in Bangladesh may now usefully unite under one umbrella all our businesses, financial and non financial, for carrying further forward the sustainable socially responsible business agenda.

I don't suppose I have time now for going into specifics of ongoing corporate sustainability initiatives in Bangladesh; I would just like to mention that these are diverse, touching all dimensions and facets of socio-economic empowerment, welfare and environmental issues. Some of our business leaders driving these initiatives are present here in this UNGC Leader's Summit, we shall hear from them about the specific initiatives in the discussion round coming next.

PART NINEOther Economic and Social Issues


Partnering for Leather Sector Development*

I am familiar with the activities of Bangladesh Leather Service Center (BLSC) project, particularly with its finance component, because of my association with the project for the last 3 years as voluntary adviser. You are aware that the overall objective of ITC-BLSC project is to increase export of footwear and leather products and consequent employment generation. On the other hand, the objective of its finance component is to arrange access to collateral free finance from banks for the target group consisting of Small and Micro Enterprises and of course artisans who got limited or no access to finance.

BLSC project has committed itself to develop a dedicated credit line (DCL) in a pilot project as conceptualized by ITC-Geneva with funding from the Government of Italy. The banks who agreed to make collateral free finance to develop DCL, asked for certain technical information and credit information on the target group of enterprises of the pilot project. In response, LSBPC provided them the required information based on the findings of a Baseline Survey (BLS) conducted in the first quarter of last year under my supervision with funding from Abdul Monem Foundation and manpower support from Sonali Bank Limited,Janata Bank Limited and Asset Management Limited.

In September, 2008 Mutual Trust Bank Limited (MTBL) sanctioned collateral free wholesale credit lines for a total of Taka 10 million to SDI at 7% interest against Bangladesh Bank's refinancing scheme. SDI, a micro finance institution (MFI), allowed collateral free retail working capital loan up to Taka 500,000/- to the Small Enterprises of BLSC's pilot project at 12% interest. SDI could not allow micro credit as there is no micro borrower or artisan in the pilot project. BLSC extended its support services to the client enterprises. The recovery rate of these collateral free supervised working capital loans has been 100%.

I would congratulate MTBL, particularly its former Managing Director K M Shafiqur Rahman for playing a pioneering role in extending credit lines. The experience of joint financing by MTBL-SDI shows that only the banks are eligible to provide small credit as its size is Taka 200,000/- to Taka 5.00 million. They have expertise and resources needed to meet all the financial requirements. They can directly finance small enterprises at market price without intervention of micro finance institution.

*'Market Development Forum: Partnering For Leather Sector Development', 23 December 2009.


I am very happy that in September, 2009 South East Bank Limited (SEBL) has joined hands with the project and sanctioned a credit line of Taka 20 million at an interest rate of 12% under Bangladesh Banks refinancing scheme for - (i) collateral free working capital loan to the target group, (ii) capital machinery loans and (iii) credit line for setting up of Common Facility Centres. The bank will also extend support services that include (a) contribution of 2% interest out of 12% charged interest for poverty alleviation of the underprivileged workers, (b) introduction of Workers' Savings Scheme and (c) developing and updating of BLSC's database etc.

While making credit investigation and review by SDI, BLSC and ITC's National Consultant, Trade Finance, it was revealed that the rented factories are highly congested, located in polluted environment without required ventilation and lighting. Hazardous machines and chemicals are handled and used without safety measures. It has been decided to arrange immediate shifting of factories of SDI's client enterprises in a suitable building before disbursement of loans under the credit line of SEBL.

I am happy to learn that around this time Janata Bank Limited has come forward and joined this project with a credit line of Taka 70 million. This credit line comprised of commercial house building loans of Tk. 4.00 million for shifting of SDI's client enterprises to suitable locations with modern facilities and Taka 30 million for financing the enterprises of the Pilot Project including the enterprises of the graduates of the Bangladesh College of Leather Technology. The line of credit will also include Linkage Finance Programme to ensure better sells of products and secured loan repayments. JBL is also expected to provide a grant of Taka 6.00 million from its CSR fund which will be utilized for addressing the compliance issues, safety measures, motivational works, dissemination of information etc.

I once again congratulate Mutual Trust Bank Limited, Southeast Bank Limited and Janata Bank Limited for coming forward with credit packages that include all the possible supports needed for the pilot project including addressing certain national priority issues like poverty alleviation. Addressing of so many complicated issues of the underprivileged sub-sector through credit lines of banks is unprecedented in the history of our commercial banks. I would request you to continue your united efforts and work in close cooperation with each other so that a model project is in place at the end of the project period for subsequent replication in other places.

In the recent past our export earnings from footwear sub-sector and from finished and crust leather has progressed substantially and surpassed all previous records. In July 2008 to June 2009 exports of footwear increased to US$ 186.93 million, finished and crust leather to US$ 177.32 million and leather goods to US$ 16.89 million. This is very encouraging in the back drop of huge bad loans in the leather sector (bad loan is Taka 831 crore out of total loan of Taka 1695 crore).

In the context of linkage finance, I will be happy to see that large and medium enterprises would come forward to further develop a vibrant partnership with small and micro enterprises so that a Linkage Finance Program can be introduced for mutual benefits of all the enterprises. Mr. Mohammad Hossain, National


Consultant, TIC has played a critical role in developing the dedicated credit line, special credit packages and the linkage finance program. I will appreciate if the banks, business partners and other concerned work with him more closely.

I am happy to know that the local and international technical experts have already identified needs of this sector in yesterday's 4 technical sessions. I am confident that international development partners will provide necessary support, both financial and technical, to address the issues identified by the experts.

Bangladesh Bank has been allowing rediscounting facilities to the financing banks and will continue to extend all possible support to this type of innovative projects aimed at developing dedicated credit line for increase of exports by small and micro producers which will help generate employment and alleviate poverty through joint efforts of our commercial banks.

Investment Confidence in Bangladesh*

The syndicated loan agreement signing ceremony for the fair sized private sector petrochemical project that will process naptha from local refineries into some further value added petrochemical products for import substitution. Today's signing of this syndicated loan agreement for Taka 2.24 billion for an energy sector project is a strong affirmation of rebound in investment confidence in Bangladesh, following some months in slowdown in the uncertainties of global downturn triggered by the global financial turmoil. This sizeable loan syndication participated by 13 local banks and financial institutions is also a reaffirmation of the strength and resilience of our financial sector that came out virtually unruffled from the global financial turmoil; well positioned to support the real sector, unlike financial sectors in mature advanced economies needing very massive rescue packages for their own survival. BB will continue extending guiding and helping hand to our financial sector in building up further on the strengths, in terms of good corporate governance and careful risk management, prudent growth promoting investments avoiding creation of speculative asset price bubbles, and entrapment of households into indebtedness for needless ostentation and conspicuous consumption.

I wish and hope for early successful completion and conversion of the project into commercial operation, and I look forward to seeing public issue of equity over the medium term. I hope the lead arranger and syndicate participants will meticulously preserve a high quality asset for this loan in order to go for outright or securitized trading in events of unforeseen liquidity needs. These secondary transactions in loan assets are important aspects of market deepening that we need to foster in term financing.

I would also wish to remind the syndication participants and other financiers present here not to neglect agriculture and SMEs in their lending activities. One reason why recovery from the global downturn is weaker in USA and UK than in Asia is that SME's in the West are still finding it hard to obtain new loans or

*SPPL Syndicated Loan Agreement Signing Ceremony, 1 February 2010.



renewal of past loans, even though larger corporates are no longer seriously constrained by lack of financing from the financial and capital markets. GOB and BB acting promptly to uphold domestic demand and output activities with the needed support for SME and agricultural financing helped to protect our economic growth from severe impairment in the global downturn. Bankers must not be found wanting in willingness and initiative expected of them in the same cause of fostering inclusive broad based growth. As things are unfolding, I can confidently reassure you all that there has already been a turnaround in the investment climate. This is being reflected in the form of growing opening of import LCs, higher container movements and stability of foreign exchange reserve despite growing remittances. Today's event is yet another indication that investment is indeed picking up and clouds of uncertainties are disappearing. If we can keep up this upbeat trend, surely Bangladesh will be able to achieve its targeted 6 percent plus economic growth this fiscal.


The Bangladesh Household Remittance Survey*

I would like to congratulate the International Organization for Migration (IOM) on their successful completion of national level household survey on remittance utilization 'The Bangladesh Household Remittance Survey 2009' which attempts to obtain a comprehensive understanding of remittance channeling and utilization patterns of migrants at the household level.

Remittance inflows from migrant workers abroad have been playing a major role in accelerating socio-economic development, promoting employment and underpinning external sector viability of Bangladesh over the last few decades. Since independence, Bangladesh has been persuading proactive policies to locate overseas labour markets for its nationals and has been remarkably successful in penetrating the labour markets of Middle East, East Asia, and North America. Between 1976 and 2009, Bangladesh received more than USD 62 billion remittances from its migrant population.

Unlike other South Asian economies, Bangladesh has been enjoying a surplus in the current account balance during the last few years. Even during the crisis period, the foreign exchange reserve crossed USD 10.0 billion underpinned by steady growth in remittance inflows. Rising steadily, annual inflows of workers' remittances have grown nearly four-fold between FY 02 and FY 09 (from USD 2.5 billion in FY 02 to USD 9.7 billion in FY 09).Contrary to apprehensions, workers' remittance inflows to Bangladesh grew buoyantly during the global financial turmoil (by 32.4 and 22.4 percent respectively in FY 08 and FY 09). Bangladesh immigrant workers being largely in low-skilled jobs did not suffer job losses extensively in host markets abroad as initially feared.

The growing inflows of remittance have been highly beneficial for Bangladesh in upholding domestic demand in the recessionary global environment, in enhancing availability of borrowing resources for both the government and the private sector, and in augmenting foreign exchange reserve cushion for coping with the uncertainties of the fragile, unstable external environment. Remittances have resulted in improved living standards of workers' families and helped in improving the income distribution in favor of poorer households.

* Seminar on 'The Bangladesh Household Remittance Survey 2009' organized by International Organization for Migration (IOM) held on 12 May 2010


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. The IOM survey finds that around 82 percent of sample households received remittances through formal channels. Remitters and recipients not well-served by banks have often been lured by fast acting hundi channels diverting the foreign exchange inflows to illegal capital flight, tax evasion and crime/terrorism financing. Besides, the survey finds positive relationship between financial literacy and the use of formal channels for remittance transfer. Bangladesh Bank (BB), on its part, has recently organized a country-wide banking sector road show to build up general population literacy on financial services and awareness against money laundering and illegal hundi channels in remittance delivery. This major new campaign-mode drive in widening and deepening financial inclusion will be repeated, appropriately refined, in other regions of the country. Besides, banks are now advised to open bank accounts for farmers at only Taka 10. About 8.5 million farmers have already opened bank accounts since the measure taken by BB. Since many farmers depend on remittances for their household expenditure, they will now be able to receive remittances directly to their accounts more easily and quickly.

BB has now been encouraging partnerships between banks and mobile phone networks for extending banking services to the door of the mass people. Fast expanding mobile telephony in Bangladesh already covers well over half the total adult population. This has opened up windows of opportunity for creative partnerships of banks and mobile telephone companies in devising cost effective arrangements for delivery of remittances (and eventually other financial services) through the countrywide area agent networks of mobile phone companies covering rural areas distant from bank branches. A number of such BB approved partnerships are already active.

Bangladesh is open for foreign direct investment in all industrial sectors excepting for four reserve sectors (defense equipments, reserve forestry, atomic energy, currency printing and minting) mentioned in the Industrial policy. Stock markets in Bangladesh are open for foreign portfolio investment by non-resident individuals or institutional investors. Fully serviced plots in developed industrial parks (EPZs) are available for foreign investors, for exportmanufacturing with duty free import of inputs. NRBs can invest in instruments like US Dollar Premium bond, US Dollar Investment Bond and Wage Earners Development Bond having attractive rate of returns. Besides, deficiencies in infrastructure (power and energy) arising from growth driven demand pressure provide excellent new investment avenues.

Bangladesh Bank, in recent time has taken firm steps to digitize the banking system to ease the process of financial services. Some of these initiatives include installation of Bangladesh Automated Clearing House, CIB online, e-banking, mobile banking, enterprise data warehouse and so on. Further proactive measures will be taken over the near and medium term to ensure safe and quick transfer of remittances. I would like to congratulate the IOM again for conducting this household remittance survey which will help the policy makers in formulating and implementing policies targeted towards smooth remittance transfer and identifying potential markets for the Bangladeshi nationals.


Skill Development Program on Personal Leadership*

It is indeed a great pleasure for me to be able to attend the opening session of this important event on 'Skill Development Program on Personal Leadership.' The theme of this workshop is truly interesting and the issue itself is sure to draw attention amongst managers and leaders from both public and private sectors. Simultaneously, given the pre-ponderance of huge pool of young people in Bangladesh, this is also a highly relevant issue.

I take this opportunity to share my views on leadership concepts as a lay man.

It is often told in management theories that leadership deals with change, inspiration, motivation and influence. In contrast, management deals more with maintaining equilibrium and the status quo. Leadership is an active, living process. It is rooted in character, forged by experience, and communicated by setting examples. In management theories leadership is expressed in various ways and explained from different perspectives. But sometimes, importance of personal leadership is overlooked, which can be defined as self-confidence backed by conviction and understanding.

Leaders in every organization are facing different challenges; the most common and at the same time difficult one is transforming the potentials into performance. In today's ever changing world, to perform our job in utmost professional manner we need to create an urgency of change in individual mindset. Any change will not be possible unless most employees are willing to help and make it happen. Here comes the importance of personal leadership which hovers around the concept of urgency of giving in one's most for a change.

Autonomy, initiative, and responsibility work hand-in-glove to form the essential elements of personal leadership. These elements act as drivers of leadership transforming it from something that is to something that does.

Effective management today is less and less about managing or administering. Effective management is about leadership, exerting personal initiative that stems from personal vision, a sense that "I know what needs to be

*Inaugural address of the workshop on 'Skill Development Program on Personal Leadership', 22 May 2010.


done, and I will do it." Effective management stems from core values that shape a personal leadership style. A leader is that manager who inspires his-her people about the norms of his/her organization and his/her expectations from and for his/her people.

In today's economy we have many hundreds of multi-segment markets, each with its own competing demands. Therefore, a new model of management is required that encourages participation. Why? Because in a market with competing needs, it is the person on the front lines who often knows more about the stakeholders and their needs than some executives sitting at the top. If the organization is to survive, it must encourage ideas that flow upward as well as downwards. Only then a synergy of ideas will take place. Such a synergy is a must for the change we are looking for.

Recently we initiated a change process in Bangladesh Bank and already finalized our next five years' strategic priorities including further realignment of our already set vision and mission statement. We will make the plan public soon. But my understanding is that without buying commitment of our employees, we will not be able to implement this strategic plan. This is the real challenge of the personal leadership.

We need leadership capable of developing vision and formulating change strategy. Those who are mere managers can only sustain status quo and cannot drive change. We need leadership adept in driving change. Such leadership does not grow overnight, but develops over years in work supported by ceaseless lifelong learning. We wish to create an environment fostering change leadership and we all are actively engaged in unleashing the desired creative energies from each of our would-be leaders through participatory engagements in terms of benchmarking, sharing experiences, targeting changed outcomes, implementing and monitoring those objectives.


Overcoming the Challenges in Financing Power Sector in Bangladesh*

Despite low per capita power consumption by regional comparison, Bangladesh now faces power shortage of 1500-1800 mw against peak demand level of 5800 mw, impeding output activities and routines of day to day life. Power import from grids of neighbors can to some extent ease the shortage but rising demand within the growing neighboring economies limits near term prospects of imports sufficient to cover the demand gap.

Highest priority has therefore been accorded to adding sufficient new domestic power generation capacity. Bridging of the demand gap by 2011, and raising of output to 8500 mw and 11500 mw respectively by 2013 and 2015 are targeted with commissioning of total 9426 mw new generation capacity by 2015. The power and fuel sector 'roadmap' June 2010 issued by the Finance Ministry laid down the plan of setting up a total of 57 smaller (up to 150 mw) and 12 larger (200 mw and higher) new power plants by year 2015, with total generation capacity of 10741 mw. Of these, 25 plants with 3780 mw capacity are planned to be solely public financed, 5 plants of total 2820 mw capacity are planned to be financed in Public-Private Partnership (PPP), and 39 plants of total 4141 mw capacity are expected to be financed solely by private sector. In the roadmap the total cost is estimated at about USD 9.0 billion, of which USD 8.0 billion is expected as private sector investment. It is, however, unclear how USD 1.0 billion can be enough for new public sector plants of total 3780 mw capacity and for PPP participation in some others, if it costs USD 8.0 billion for the private sector to set up plants of total capacity not exceeding 6961 mw including PPP participations. Plans for the new installations aim to avoid the existing over-dependence on natural gas; using a more diverse range of fuels including diesel, furnace oil, coal and nuclear, besides natural gas. Renewable energy (solar, wind, biomass) based power generation is also planned to be raised to five and ten percent of total output respectively by years 2015 and 2020.

Financing of the estimated USD 9.0 billion investments by year 2015 will be a challenge, but not an intractable one if properly planned and managed. The afore-mentioned apparent imbalance in cost estimates indicates that public investment may need to be higher, more so if private sector response turns out to be slow.

*Conference on 'Investment in Power Sector of Bangladesh: Opportunities and Challenges', 3 July 2010.


The large bulk of the estimated USD 9.0 billion investments over five years will have to be spent on import of the needed plants, equipment and technical services from abroad. Sole reliance on domestic investment will therefore be impractical, putting too much pressure on current inflows and reserves in foreign exchange, neither of these now on rapid rise. The financing plans for power sector investments will therefore need to welcome and attract external equity and longer term debt investments, besides local investments to the extent the domestic markets can provide without undue strain.

The government and BB have already initiated steps to activate and facilitate mobilization of domestic and external investments in the power and fuel sector, including holding of road-shows in major global financial hubs. It will be helpful to look at the financing challenges and options in a disaggregated way, according to plant sizes and investment sources planned for in GOB's power and fuel sector 'roadmap'.

As earlier mentioned, the 'roadmap' plans for 20 new smaller plants of total 2010 mw capacity and 5 new larger plants of total 1770 mw capacity by year 2015 financed solely by public sector. Besides, 3 smaller plants of total 220 mw capacity and 2 larger plants of total 2600 mw capacity are planned to be financed partly by public investment, in partnerships with the private sector (PPPs).

For the bulk of the foreign exchange component of the public sector outlays in power sector infrastructure (including transmission lines, natural gas import terminal and power plants), government can approach multilateral and bilateral official development partners for concessional long term loans. As a low income developing economy, Bangladesh remains eligible for concessional ODA from development partners.

The local expense components of the planned public sector outlays can be financed with government's routine domestic borrowing for deficit financing; but earmarked borrowing for infrastructure sector by issuing freely tradable long dated (10-20 year) 'infrastructure bonds' in Taka will be a more appropriate option, helping deepen the domestic bond market. Like the existing treasury bonds, the infrastructure bonds may be kept available for non-resident investors as well; with free convertibility and repatriability of coupon interest earnings and secondary sale/ redemption proceeds of bonds held by them, net of taxes if any.

Partnership modalities in the PPPs will presumably vary somewhat from project to project, the example of Jatrabari flyover project now being implemented under public-private partnership may be instructive for the power sector PPPs.

The roadmap expects sole private sector sponsorship of 34 new smaller and 5 new larger plants with total capacities respectively of 2641 mw and 1500 mw by year 2015 (including 14 rental plants of total 1647 mw capacity expected to be commissioned within year 2010); besides the earlier mentioned private sector participation in PPPs for 3 smaller and 2 larger plants of total 2820 mw capacity.

As at present, the smaller private sector power plant projects can be financed mainly by the domestic debt and capital markets, supplemented where needed by external term borrowing with clearance from the BOI Scrutiny Committee. Greenfield entrepreneurs in the sector will need to put up own funds as initial equity, while those with past track records will be able to access the capital market with public issue of equity.

To facilitate accessing larger sized local borrowing for power projects, recently BB has temporarily waived single borrower exposure limits on bank lending to these projects. Further, a USD 50.0 million IDA supported credit line titled Investment Promotion and Financing Facility (IPFF) administered by BB has co-financed with local lenders in term lending to seven smallpower projects. With the initial allocation utilized fully, the IPFF is being replenished with a larger (USD 257 million) new infusion from IDA.

External borrowing in foreign currencies by private sector projects in the power sector has also been facilitated by the recent first ever sovereign credit rating of Bangladesh (by S&P, Moody's); placing Bangladesh favorably, only behind India in the South Asian region, with stable outlook.

To further facilitate foreign currency term borrowing by the power projects (and other projects seen as high priority) at the more favorable end of the prevailing market rates, it is possible to set aside a portion from the foreign exchange reserves (say, a couple of billion USD) for foreign currency term lending to the projects (particularly the smaller ones with little familiarity with external borrowing), disbursable through the co-financing domestic banks that will guarantee repayments in the currency of borrowing. Besides more affordable rate for the borrowers, this option will improve somewhat the prevailing low earnings on reserve investments, albeit with tradeoff in liquidity. Such an arrangement will require legal empowerment for using part of the reserves as an investment vehicle somewhat in the nature of a sovereign wealth fund.

Renewable energy technologies are still evolving, and with high initial costs despite tax breaks and other incentives are yet to attain cost competitiveness as commercial proposition. Large scale commercial ventures in wind or solar based power generation appear unlikely in the near term, government's roadmap for up to year 2015 mentions modest plans for 4 solar power units of 10-15 mw capacity each and a wind farm power unit of 100 mw capacity.

Support from the UN sponsored carbon trading mechanism and from international philanthropies are available for mitigating the higher costs and risks in renewable energy projects, exemptions/waivers in govt. taxes/duties for such projects are also generous. With the projects making use of these supports, financing needs of the smaller scale renewable energy based power projects are likely to be adequately met by the domestic debt and equity markets.

Quite appropriately, solar power units were introduced in Bangladesh firstly in household scale for dwellers in remote off-grid areas; more than half a million home solar units are by now in use. Urban households now seriously afflicted by frequent load shedding will also be interested in solar power units, with appropriate promotion. Concessional refinance is available from BB against loans for installation of renewable energy projects including solar power units. A comprehensive program can be taken up collaboratively by the BB, banks/financial institutions and the concerned government department to scale up several fold the lending (and refinance support) activities for renewable energy based power generation(including solar, biomass and wind powered).

In general, renewable energy is unlikely as yet to be perceived by businesses as cost competitive for their manufacturing operations, but significant part of power needs of their offices and commercial outlets can be met using renewable energy based power units, as in the examples in the honorable Prime Minister's Office


and in BB HO. The comprehensive program suggested above can motivate and urge the private corporate sector to go for use of significant extent of power generated in renewable energy based plants (they can be advised to treat the higher cost involved as a CSR expenditure). The program will also need to be proactive in helping renewable energy based projects in accessing technical know-how and financial supports available from external sources including the globally active philanthropies and the carbon trading mechanism.

The likely total contribution of renewable energy based power in meeting the demand gap may remain modest in size, but will still be significant in smoothing out spikes in load on the national grid during peak demand periods. The environmental benefits must also not be forgotten.

The larger scale power projects in the 'roadmap' earmarked for private sector and PPP sponsorships (particularly the giga-watt sized ones) are likely to need larger financing than what the domestic markets can readily provide. These would in general be suitable for part or sole participation of foreign equity. Risk sharing mechanisms in financing such larger projects exist in WB's Multilateral Investment Guarantee Agency (MIGA); credit lines and guarantees are available also from export credit agencies of developed and emerging market countries. Besides conversion and repatriation guarantees on current income from nonresident investments inherent in current account convertibility of Taka, the Foreign Private Investment (Promotion and Protection) Act 1980 and a host of bilateral investment protection agreements with foreign governments protect foreign private investments in Bangladesh from expropriation and from restrictions on convertibility and repatriability of disinvestment proceeds.

Against the above mentioned facilitations and incentives for local and foreign private investments in power sector in Bangladesh, the cash strapped financial position of BPDB (the purchaser of power for the national grid from private sector power plants) is seen as a significant discouraging factor. BPDB's receipts at subsidized user prices fall short of amounts payable to private sector power producers, causing irregular settlement of their bills, with uncertain timing of PDB's receipt of subsidies from govt. budget allocations. A durable remedy would be in BPBD being allowed to recover full cost from power users, enabling it to make timely payments for purchases from private producers. The government can make separate arrangement of direct payment of subsidies to deserving users, including low income households consuming up to, say, 50 units a month (as in India), farmers using power for irrigation, and manufacturing establishments including small and cottage industries using power for their output activities. Exclusion of better-off households and commercial establishments from subsidized power tariff will relieve the government's budgetary burden significantly.

Summing up, comprehensive institutional arrangements are in place for addressing the financing challenges in the urgently needed power sector investments in Bangladesh, of course with scope for further development and expansion as needs expand. It will be useful for government's Energy and Finance Ministries, BB and BOI to work in close co-ordination in ensuring flexibility and responsiveness of the available arrangements to the needs of undertakings of various sizes and types. Regular periodical contacts and consultations of these authorities with power sector entrepreneurs and the financing community will also be important in tracking and promptly addressing the needs and issues as they arise.


SEAF Bangladesh Ventures*

Small Enterprise Assistance Fund (SEAF) works in emerging markets and invests in small and medium enterprises (SMEs). SEAF is a global investment partner connecting local enterprises with the World and works with local partners to achieve resilient economic growth, with equally robust returns for their investors. SEAF fund is being invested in a number of countries of the global economy. I am glad to know that SEAF has decided to operate in Bangladesh to invest in small and medium enterprises with strategic partnership of Venture Investment Bangladesh Limited (VIPBL) which is a well-known venture investment firm in Bangladesh.

SEAF's objective of providing long-term capital to growth enhancing mid-sized enterprises under-served by traditional sources of finance supports Bangladesh Bank's financial inclusion strategies of bringing the excluded population segments of the country into the formal financial system. Besides, SEAF's investment strategy of stressing on growth oriented sectors including agriculture, manufacturing and technology is praiseworthy. Along with providing pre-investment business advisory support like development of business plan and industry research, SEAF is also offering post-investment business support including operational improvement and internal control development. I am also pleased to know that SEAF will be involved in conducting evaluation of growth initiatives of SMEs, particularly the medium ones. I am equally pleased to see SEAF partnering with IFC, which is also providing technical assistance to Bangladesh Bank in monitoring and evaluation of SME sector.

Venture capital investments have significant positive impact on economic development as they create jobs faster than others and boost domestic economic growth through facilitating firms in improving international competitiveness. SME is indeed an 'employment generating inclusive growth engine'. I am sure that SEAF will add strength to this emerging powerhouse which has been providing impetus to Bangladesh's drive for inclusive growth by enhancing domestic demand.

In Bangladesh, venture investment is a new idea and we lack in venture capital both in the public and private sector. We, of course, have a sort of venture capital called Equity and Entrepreneurship Fund (EEF) which is now being reformed and revitalized. We have to improve the operation of EEF in the coming days given the new initiatives like this. In this context we welcome this initiative of the SEAF and VIPBL. We, in the central bank are working on this issue

*Launching Ceremony of SEAF Bangladesh Ventures LLC, 7 November 2010.


specifically to establish a public-private partnership model in venture investment arena.

You all know that Bangladesh Bank is stressing on small and medium enterprises because of its indispensible role in economic development. We see SME as an effective tool for rapid and sustained economic growth, employment generation, narrowing the gap of income inequality, women empowerment and poverty alleviation. The present government as well as Bangladesh Bank put greater emphasis on the development of SME sector considering it as the driving force for rapid industrialization.

As part of its strategic plan, Bangladesh Bank strongly believes in deeper financial inclusion and encouraging financial institutions to provide financial services to the unserved and under-served. Bangladesh Bank has issued a comprehensive policy and programs on SME finance and development for the first time in Bangladesh. We have already taken a lot of action plan for enhancing access to finance in this sector. We are implementing our program step by step with firm commitment of moving forward. All the banks and NBFIs have shown their enthusiasm in the development of SME. BB is refinancing a part of SME funding. Women entrepreneurs have been especially prioritized. Around 5000 women entrepreneurs are being added every quarter now. We have been able to maintain above 6 percent growth even during the global financial meltdown mainly because of our focused support to SMEs and agriculture.

Sovereign credit ratings of BB- and Ba3 by Standard and Poor's (S&Ps) and Moody's respectively ranked Bangladesh only behind India in South Asia with stable outlook. There are obstacles but we are confident that by our united effort, spirit and dedication, we shall overcome the problems and fulfill our dream of a vibrant SME sector in Bangladesh. Bangladesh Bank is working closely with other banks and NBFIs, different Ministries, Government departments, BSCIC, SME Foundation, professional organizations, chambers of commerce, District and local government institutions, public representatives for promoting synergies in faster development of SMEs. We are trying to establish greater linkages among all stakeholders.

Many international organizations like ADB, IFC, JICA and World Bank group have extended their support for development of SME and we highly appreciate their contributions.

We, in the central bank, are working with 'out of the box' attitudes. Many central banks in the world are not engaged in such development oriented activities. We believe SME is for country sake and people sake. You will be glad to know that I have already referred a proposal of VIPBL to the SME and Special Programmes Department of Bangladesh Bank to examine and come up with a suitable model for establishing an effective public-private partnership for venture fund in Bangladesh.

We welcome the start of the journey of SEAF Bangladesh Ventures LLC in Bangladesh. I hope the joint effort of SEAF Bangladesh Ventures LLC and Venture Investment Partners Limited (VIPBL) will contribute to the development of local growth oriented SMEs and will motivate both the public and private sectors to come up with more venture capital in Bangladesh. I would like to appeal to you all to come up and put joint effort in ensuring rapid development of SMEs for faster economic growth and sustainable development of Bangladesh.


Investment Promotion and Financing Facility*

I am very grateful that our honorable Finance Minister has kindly spared time to be with us today to declare the launch of second phase of the IPFF sponsored jointly by the Government of Bangladesh (GOB) and the World Bank (WB) to augment availability of long term debt funds in the domestic financial market for implementation of physical infrastructure projects. As we all know, banks and financial institutions in Bangladesh mobilize savings mainly in deposits of shorter tenors, seldom extending beyond three years; whereas longer gestation physical infrastructure investments to be viable often require debt extending over ten years or more. The IPFF managed by BB is intended to ease this financing constraint. Participating banks and financial institutions (PFIs) can borrow from IPFF for up to 85 percent of loans to be made to projects in power generation, transmission and distribution; air, sea and river ports; environmental and waste management; expressways, bridges, flyovers etc.; water supply and sewerage; industrial parks. Repayment periods for the participating banks & financial institutions, matching those for their borrower projects, can be as long as 20 years, with 3-10 year grace periods from dates of first disbursement. This is indeed an exceptional opportunity for our investors needing long term financing support. I want to thank both the Government of Bangladesh and the World Bank for trusting Bangladesh Bank to implement this innovative PPP project.

As you have heard, the Taka 4.22 billion allocation for first phase of the IPFF initiated in 2006 has been utilized fully in financing PFIs for their on lending to seven private sector power generation plants. All these plants are now up and running, adding 178 megawatts of power to the national grid. In addition, the IPFF conducted a training workshop for officials of ministries and GOB departments and/or agencies involved with implementation of public-private partnership (PPP) projects, out of the TA component of the first phase. I heartily congratulate the relevant teams in BB, GOB and WB for successful implementation of the first phase of IPFF. The second phase is going to be larger, with the WB and GOB contributing USD 250 million and Taka equivalent of USD 50 million respectively in lending funds, and also with USD 7 million from WB in technical assistance. Over the period up to December 2014 the second phase will finance a broader range of physical infrastructure projects besides power

*Launching of the 'Investment Promotion and Financing Facility (IPFF) 2nd phase', 22 February 2011.


generation. The TA component of the second phase will, inter alia, provide further training assistance to PPP office and units in Prime Minister's Office, Finance Ministry, line ministries and agencies. The IPFF is thus of particular significance for our efforts of accelerating our desired economic growth, redressing deficiencies in physical infrastructure and will surely facilitate and hasten new investments in manufacturing, services and commercial farming.

We are grateful for the helping hand of WB in development of the country's physical and financial infrastructure; and we are looking forward to further support and assistance in BB's efforts to bring into our financial markets newer modes of mobilizing long term savings for long term project financing, from entities carrying long term liabilities like life insurance, pension, provident and gratuity funds. Let me record my gratitude to WB for supporting BB for improving its various infrastructures under CBSP which is progressing at the desired pace. We hope to get continuous support from WB in future enhancing the capacity of the central bank and as well as other financial institutions. As the projects supported by IPFF financing go into successful commercial operation, they can be motivated and assisted in issuing asset-backed debt securities or hybrid securities with conversion option to equity; freeing up funds lent by PFIs for lending to other projects. Projects of new entrepreneurs yet to have needed track records for debt or equity issuance in the capital market can be supported effectively in the venture capital and/or private equity financing mode, areas yet to develop adequately in our markets. Sick projects in loan default with potential for restructuring can also be assisted usefully in the venture capital and/or private equity financing modes. Our markets have lots to learn from development partners like the WB in these areas, and I believe that WB will remain as forthcoming as ever with their support and technical assistance in these areas. Finally, I am also confident that under the wise guidance of our honorable Finance Minister, such fiscal, legal and regulatory changes as may be needed from time to time for smooth financial markets development will be attended to by GOB with due dispatch.


Investment Plans in Agriculture, Food Security and Nutrition*

Now that drawing up of our government's draft Sixth Five Year Plan (SFYP) is at its final stage, this consultation meeting on investment plans in sectors like agriculture, food security and nutrition are of crucial importance for inclusive growth and poverty eradication provides an excellent opportunity of locating and correcting for gaps and omissions if any, and of seamlessly dovetailing the domestic public and private investment targets and priorities with those of our external development partners. I am much heartened to see the MCCI co-sponsoring this event with FAO, demonstrating the growing engagement of our private sector in pursuit of growth in planned and organized manner.

Presentations by subject experts and comments thereon by designated discussants and by participants in the floor discussion have covered quite comprehensively the extensive and multi-faceted action and investment agenda in agriculture, food security and nutrition fronts. Let me add to these a few observations on the role for our financial sector in supporting the massive action and investment agenda towards attaining higher agricultural output, greater food security and better nutrition.

The recurring seasonal cycles of food and non-food crop farming need regular cycles of necessary financing, catered to thus far mainly by two state owned specialized agricultural banks. Until recently, the vibrantly growing private sector commercial banks had little or no engagement in agricultural financing, the four state owned commercial banks had modest not-so-spontaneous engagements. The countrywide campaign undertaken by BB for broader, deeper financial inclusion is changing this situation, by sensitizing state owned and private sector commercial banks about their corporate social responsibilities and about the potentials for profitable business in agricultural and rural financing. A new model of lending through a reputed MFI developed specifically for lending to non- landowning sharecroppers is now on trial run, state owned banks have recently opened more than nine million new accounts in the names of rural farmers, and banks are being encouraged and supported in teaming up with mobile phone and other IT based platforms in innovating cost saving modes of financial service

*MCCI-FAO consultation meeting on Bangladesh CIP in agriculture, food security and nutrition, 6 March 2011.


delivery to clients in dispersed remote rural locations. Besides business potentials in financing small-holder agriculture, new opportunities are also opening up fast for larger scale financing of commercial agriculture, particularly in dairy, poultry, pisciculture and export oriented horticulture. Local production of import substituting spice crops is being supported with subsidized financing at 2%; commercial farming clusters of higher value crops and fruits like carrots, guava, plums etc. are being encouraged by BB in various regions including Chalan Beel, Chittagong Hill Tracts and Jainti of Sylhet. Production of new breeds of high yield seeds suited to regional climatic diversities is also among activities with room for major new investment. I would be happy to see attention of our private sector entrepreneurs and external development partners focusing on the potentials and investment needs in these areas.

For sustained impact in promotion of agricultural and rural financing, BB's financial inclusion initiative now needs to be supplemented with initiatives of introducing new market-based instruments for mitigation of output risk (crop loss in climatic adversity) and price risk (sharp decline in market price for crops in high output, as now facing our potato growers) for farmers and their financiers. Crop insurance available in mature high income economies as also models now being tested in emerging economies like India generally involve some extent of fiscal subsidy support. Farmers in Bangladesh also get grant assistance in cash and in kind in occasional events of major crop loss, and in public procurement at support price in years of high output. Appropriately designed crop insurance schemes can utilize these fiscal subsidy outlays in orderly, structured manner alongside the insurance premium earnings. With a well functioning crop insurance scheme mitigating risks, lending institutions in the market will be far more spontaneous in financing agriculture. I would be happy to see development of crop insurance schemes suitably included in government's SFYP and the CIP now being discussed.


Improving Remittance Infrastructure*

First of all, I would like to congratulate Remittances and Payments Challenge Fund (RPCF) of the Remittance and Payment Partnership (RPP) project for organizing this dissemination workshop portraying the success stories of the projects aimed to stimulate and catalyze innovation of new remittance and transfer products, improve existing remittance infrastructure and the use of remittances.

Each inward remittance is a brick in the pillar of success of Bangladesh in fighting the global economic crisis. Bangladesh possesses a very large diaspora community and receives rather large remittance inflows. Remittance transfers to Bangladesh have grown dramatically over the past two decades and have generated considerable excitement in recent years over their potential to aid growth and development of the country. Bangladesh Bank, through Remittance and Payments Challenge Fund (RPCF) of Remittance and Payments Partnership (RPP) Project, has been taking a number of steps to ensure a country-wide safe and efficient payment systems to expedite faster delivery of remittances across the country and also on simplifying the procedure of sending remittances both domestically and internationally.

I am very happy to know that RPCF has successfully contributed to this second objective by extending risk-sharing grant to 18 innovative projects out of 148 applications.

To me, the challenge was not just to award grants to the selected projects but to create awareness in the market about its capability to work creatively for launching innovative risk-free and fast and convenient remittance services.

As for Bangladesh Bank, we have set strategy for establishing a modern payment and settlement system infrastructure to deliver remittance to the remotest corner of rural Bangladesh in the hand of that semi-illiterate beneficiary safely, securely and in a hassle-free manner. We are informally working on ensuring financial inclusion by encouraging farmers to open bank accounts and instructed the banks to make it a low cost one. We are also working on mobile

*Dissemination Workshop on 'The Remittances and Payments Challenge Fund' (RPCF) of the Remittance and Payment Partnership (RPP) Project, 23 March 2011.


technology based cost-effective financial transactions. Here, I want to recognise contribution of the excellent partnership developed amongst banks, MFIs and mobile phone operators. We have already automated cheque processing systems and electronic funds transfer under the RPP project. All these are laying foundations for access to every banked and un-banked consumer as well as every business customer to facilitate electronic commerce.

I believe, output from RPCF's efforts will certainly result in increased migrant-family income, higher savings, increased social security, household employment generation and skills and technical knowledge development which will result in flourishing rural economy and local financial market in the rural areas with overall contribution to the increase of GDP. This is certainly enhancing domestic demand, an important pillar of our success in achieving consistent broad-based inclusive growth. Success from these kinds of initiatives will encourage remitters to send more remittances also.

Let us set the stop-watch time from this moment onward to make a self-reliant, consistently broad-based, vibrant economy of Bangladesh.


Deposit Insurance*

Let me begin with an affirmation of our oneness with the people and government of Japan in sharing the pains and bereavements from the recent sequence of earthquake-tsunami-nuclear disasters. The Japanese people and government have always been at the forefront of those coming forward with aid and assistance at any event of disaster affecting others. In this catastrophic debacle in Japan our hearts are with them, in grief and in prayers for fortitude in overcoming the debacle.

I am very glad that the APRC of IADI has chosen to visit Bangladesh with a fairly large outreach team with members from a number of countries in the region, bringing in a wealth of expertise in policies and practices of deposit insurance. Interactions with the APRC outreach team members in today's seminar sessions will benefit BB's Deposit Insurance team vastly, deepening their knowledge and appreciation of current trends of principles and practices in deposit insurance in various jurisdictions.

Deposit insurance as an instrument in BB's financial stability toolkit dates back from 1984. BB's board of directors is also the Trustee Board of the Deposit Insurance Scheme, which collects mandatory premiums from banks as insurance covers (not exceeding Taka one hundred thousand per depositor) on deposits in their books. The premium collections are managed by the Deposit Insurance Trust Fund; depositors are to lodge claims with the Scheme in the event of a deposit-taking bank going into liquidation. Since introduction of the Scheme in Bangladesh there have been two episodes in which two troubled banks needed to be restructured or placed in liquidation. Both were restructured by recapitalization to required levels in new equity structures fully protecting the interests of small depositors. As the troubled banks were restructured rather than liquidated, no occasion arose for claims on the funds of the Deposit Insurance Scheme. Absence of any call on its resources thus far has resulted in the Scheme looking rather passive, merely collecting insurance premiums from banks and investing the trust funds of the scheme. The APRC itself may not have found the Bangladesh Scheme a very active member-participant in its various pursuits. The decision of APRC to come up here with an outreach team has

*International seminar on Deposit Insurance organized by APRC of IADI, 27 March 2011.


however already energized our Deposit Insurance team considerably; I understand they are planning a self assessment exercise with reference to the core principles for effective deposit insurance systems developed by IADI.

I am looking forward to steadily deepening inter-active relationship between our deposit insurance scheme and APRC-IADI, towards positioning and maintaining our scheme as a potent and effective tool safeguarding the financial stability in Bangladesh.


Entrepreneurship and Development: Experiences, Practices and Policies*

The keynote paper 'Promoting micro-entrepreneurship in the developing world' brings out some important findings.

Contribution to capital increases income and profits of micro-enterprises; the variance and risks in returns suggest that equity may in many cases be a more appropriate mode of capital augmentation than credit. In Bangladesh, a VCC firm providing equity support to micro-enterprises is operating on a modest scale. Banks and MFIs engaged in micro-enterprise financing programs may consider adopting a part credit-part equity option.

The extent of new employment generation by micro-enterprises remains modest, constrained by limitations of entrepreneurs in managing workers and in willingness to delegate. This indicates, inter alia, the need for external business development / skill development support for the micro-enterprises. If properly pursued this may open up a new opportunity for development of yet another kind of micro-enterprises called skill development and/or business development centres.

The first paper in the second session in day one identifies the disincentives faced by micro-entrepreneurs; public institutions like the SME foundations can play role in bringing down the disincentives and promoting entrepreneurship. Even, central bank can play a pro-active role, which BB is already playing in providing necessary refinance or seed money under its SME financing and Equity and Entrepreneurship Fund initiatives.

The second paper in session two finds BRAC Bank effective in promoting small enterprises, and sees a role in this for MFIs. BB's financial inclusion initiative is engaging all banks in SME financing, and will support Bank-MFI partnerships in this. B-kash, a joint venture between BRAC Bank and Money in Motion (MiM), USA, is an innovative mobile banking initiative which will provide mobile financial services for banked and unbanked people augmenting the inclusion of un-served and under-served rural and urban people.

*International conference on 'Entrepreneurship and Development: Experiences, Practices and Policies', 28 March 2011.


Two papers were presented in the third session of day one. Both papers report heartening success in some Bangladeshi and Indian MFI intervention programs in transforming economic lines of ultra (hardcore) poor increasing their income and food security along with spillover effects of community-based structural changes in each country. The core lesson here is that extending micro-finance alone will do little to improve the lot of ultra poor who are constrained by poor health, poor education and other debilitating constraints. Micro-credit will necessarily need to be preceded by transfers in earning assets and in case for subsistence for some period. Productive safety net initiatives by BRAC in Bangladesh and Bandhan India certainly are laudable, but scaling up of this effort nationwide can be hastened by public-private partnerships in this social interventions; government (represented perhaps by the SME Foundation/PKSF in Bangladesh) and MFIs can team up to devise programs in which the costs of asset transfer/ subsistence support transfer can be borne by the government.

The three papers presented in session one of day two bring up useful micro-economic analysis confirming as expected the case for greater openness in trade and attracting FDI for higher productivity; underscores the need for entrepreneurs and their supporting agencies to focus on longer term success, building up reputation and product demand with quality improvement and product differentiation. Our textiles and apparels export sector has not perhaps yet passed its adolescent stage of vigorous growth, but we have started seeing consolidation and/or new entry as ever larger, ever more integrated entities.

In-depth studies like those presented in the seminar sessions are considerably deepening our understanding of the process of development and the ways of useful interventions therein. I am looking forward to the initiatives which will be going way further in the coming days, contributing positively to the efficiency of the programs and the institutions combating poverty and promoting broad-based and equitable inclusive growth.

I will appreciate if IGC researchers also come forward to evaluate and assess the outcomes of some of the innovative financial inclusion initiatives which BB has been supporting through various kinds of partnerships with banks, MFIs and micro-entrepreneurs.


Remittances for Community Development*

Remittances have emerged as one of the key drivers of economic growth and poverty alleviation in Bangladesh amounting to more than 10.0 percent of GDP and rising from 5.0 percent of GDP in the beginning of 2000s. Annual average growth in remittances has increased significantly from 14.8 percent in the 1980s to 19.4 percent in the 2000s. Over the last 5 years (FY 2006-10), remittance inflows in Bangladesh have grown by more than 23.0 percent, compared to around 21.0 percent in India, 17.0 percent in Pakistan and 13.0 percent in Sri Lanka.Thanks to our overseas workers whose extensive efforts have made Bangladesh one of the major remittance recipient countries in the world (ranked 7 in 2010).

Bangladesh economy was impacted only mildly by the recent global financial crisis and economic slowdown. Strong rebound in external trade with above 40.0 percent growth in exports and imports in the first nine months of current fiscal, has followed a brief spell of slowdown. Remittance inflow in FY 2009-10 was around 11.0 billion, a 13.4 percent growth over the previous fiscal year. Despite adverse impacts from the global economic crisis and recent political turmoil in the Middle East, growth in remittance inflows during the first ten months of current fiscal year remained positive at 4.3 percent. Aided by rapid growth in exports and remittances, foreign exchange reserves in Bangladesh have crossed USD 11.0 billion in the current fiscal. Despite being a trade deficit country, Bangladesh enjoyed positive balance in current account during the last five years particularly due to continuation of impressive growth in remittances.

Remittances have significant socio-economic impact at community and household levels through meeting basic nutritional needs of family members, improved living condition,higher investment in children's education, increased spending in healthcare, increased social security for elderly people, higher investment in income generating activities and so on. However, it is observed that the bulk of remittances are used for consumption of food, clothing and agricultural land, home construction/repair and loan repayments with only little

*International conference on 'Remittances for Community Development: Alternative Schemes and Best Practices'' organized by BASUG and INAFI Bangladesh, 10 May 2011.


left for community development activities. Perhaps non-resident Bangladeshis find it difficult to locate appropriate channels for disbursing their money for such community development initiatives. Local NGOs can play active role in this regard in terms of accumulating and distributing NRB funds for such philanthropic activities in remote areas. Besides, government agencies and banks can promote such philanthropic activities through their websites.

Anecdotal data suggests that around 2.0 million Bangladeshi migrants are staying in USA, Canada, UK, Australia, Italy, Greece and other European countries. Many of these skilled and highly educated NRBs have changed their fate through professional qualification and business entrepreneurship. It is quite encouraging that they are now showing interests in investment in large industries and infrastructure development and also in community development of Bangladesh.

Philanthropic activities by NRBs have helped improve livelihood of many people, particularly the rural poor. We hope that they will continue such noble initiatives in future; even with greater enthusiasm. I am happy to learn that BASUG jointly with a Dutch University and INAFI have initiated a project to explore the Remittances for Community Development (RfCD) schemes in Bangladesh undertaken by the NRBs which I believe will allow us to get greater information about such schemes undertaken by NRBs. Bangladesh Bank, along with the government, is encouraging such RfCD initiatives and may be a policy guideline specifying role of different government agencies in encouraging such activities will be helpful in future.

Virtually all industrial sectors in Bangladesh are open with opportunities for investment by NRBs. Conventional power generation and renewable energy are among the high investment priority sectors. NRBs know better the import demands and preferential tariff opportunities in their host countries; they can use this knowledge in profitable investment in setting up cost-effective labor intensive export manufacturing bases in Bangladesh producing for markets in host countries and elsewhere. Besides goods, service exports (back office processes, software services, call centers, basic legal documentation services and so forth) are promising areas. Tourism, hotels, tertiary care hospitals etc. are among other prospective areas for NRB investment in Bangladesh. Certainly, Bangladesh faces many challenges like inadequate infrastructure, energy supply, and poor urbanization. But these challenges can be transformed into investment opportunities as well. I hope NRBs will participate in this process of transformation.

Different savings instruments such as non-resident foreign currency deposit, US Dollar premium bond, wage earners development bond etc are available for investment by NRBs. The government is encouraging public-private partnership (PPP), tax holiday and exemption on investment to boost investment by NRBs. Recently, the government has launched NRB Bank which I believe will be beneficial to both temporary migrants and permanent NRBs. Bangladesh Bank has also taken major initiatives for enhancing easy and hassle-free remittance transfer such as allowing MFIs and post office to use their branches for remittance transfer, remittance transfer by banks using their mobile phone outlets and so on.


I would like to conclude that Bangladesh has an ethnically homogeneous population, with large proportion in young and economically active age groups. Over the last 35 years since 1976, more than 7.0 million Bangladeshi workers migrated to the rest of the world. If we can provide proper education and training so as to make them skilled and competent with modern technology, the number of workers and volume of remittances could easily be increased substantially in future.


Social Protection in Bangladesh*

Scaling up of social protection in Bangladesh is a key requisite for faster poverty elimination with inclusive economic and social growth that we are all working for.

The papers presented in the session have provided important perspectives and insights into the issues and challenges involved in the scaling up processes. Interestingly, though Bangladesh is still a low income economy, management and delivery of social protection pose more of challenge in this task than do resource limitations. Dr. Sen's paper reports threefold increase in Bangladesh public expenditure for social protection from 5 percent in 1990s to 15 percent in FY 12. This substantial expansion in social protection without impairment of budget sustainability (keeping deficits at lower single digit levels) is no mean achievement. Unconditional transfer based public safety net programs are helping out the poorest and most vulnerable, while the conditional cash transfers like those for education are advancing human development and gender equality, hastening attainment of the MDGs. The transfer payment based programs for relieving extreme poverty are being supplemented by multi-pronged broader poverty reduction initiatives; including pro-poor public expenditure for health, education and social empowerment, the decades-old civil society activism of micro-credit institutions (many of them now providing micro-insurance services besides micro-credit), and BB's more recent financial inclusion campaign promoting adequate financing of small holder agriculture, rural and urban SMEs, renewable energy and other environmentally benign 'green' initiatives. A recent joint WB-PPRC study using nationally representative household survey data finds that access to micro-finance is a significant determinant of the ability of the poor to cope with shocks. Employment and income generated by the micro-finance supported farm and non-farm SMEs are accelerating poverty reduction and usefully contributing to sustained broad based economic and social growth; halving headline poverty in Bangladesh in two decades from 59 percent in 1990

*Conference on 'Moving the Social Protection Agenda Forward in Bangladesh' organized by UNDP, 10 October 2011.

How do the poor cope with shocks in Bangladesh? Evidence from survey data; by Indhira Santos, Iffath Sharif, Hossain Zillur Rahman, Hasan Zaman: Policy Research Working Paper, the World Bank, South Asia region, Social Protection Unit; September 2011.


to 31 percent in 2010.

Impressive as these positive outcomes are, benefits from the social protection initiatives would have been substantially higher if we could address some persistent significant weaknesses on the flip side; including the lack of reliable and adequate data bases on the target groups, and inefficient, slow and costly delivery infrastructures for the social protection benefits, plagued with leakages and misallocations. These issues crucial for sustained scaling up of social protection are dwelt upon in the papers by Ms. Ibrahim and Mr. Khan. Ms. Ibrahim's paper reports the issues and challenges in establishing reliable data bases on the target population segments for social protection interventions; while Mr. Khan's paper discusses the need for a modern IT based infrastructure for efficient delivery of social protection benefits. I am happy to be able to mention some important recent progress in this direction from BB initiatives. Fully automated clearing and settlement platforms for both paper based and electronic interbank fund transfers throughout the country are already operational, providing a secure payment and settlement infrastructure supporting the operation of many mobile phone, smart-card based platforms for efficient payment flows between individuals, households, businesses and public authorities; BB has already issued necessary guidelines for mobile phone based payments. Besides this, the state-owned banks are opening accounts in the names of small farmers and people of small means with nominal deposits as low as Taka 10; more than nine million such accounts have already been opened and are in use. Public authorities paying out social security benefits to target groups can conveniently use these bank accounts and the mobile phone/smart-card based platforms for leakage free direct delivery of social protection benefits to recipients.

The papers by Professor Armando Barrianos and Professor Khondker dwell on the fiscal and financial dimensions of social protection systems. The bottom line here is that to be sustainable, growing needs of public resources on safety net programs for the chronic or extreme poor will have to be funded by public revenues. Other public interventions targeting broader decline in poverty headcount can be usefully supplemented by domestic and external support from civil society initiatives, private philanthropic institutions, and initiatives of public institutions like BB's financial inclusion campaign.

The low tax-GDP ratio in Bangladesh leaves ample room for increased funding of public expenditure for poverty reduction from growing tax revenues; provided that the economy continues on sustained growth path. Despite recent transient episode of inflationary pressure from external sources and growth related stresses, there should be no doubt about the Bangladesh economy being on a higher growth trajectory for the medium term; both government and BB are firmly committed to maintaining a stable macro-economic environment fostering inclusive economic and social growth at a sustained and steadily growing pace.

Support from international agencies will remain useful and welcome; as much or more so for learning opportunity from experiences elsewhere as for any financial or physical contribution.


Eradicating Extreme Poverty: Whose Responsibility Is It?*

Besides sustained government efforts with steadily rising fiscal allocations for anti-poverty interventions including food security, social safety net and human development for the poor and vulnerable, NGO's initiatives funded by local and foreign charities and findings have been contributing substantially to poverty eradication efforts.

In recent years financial and non-financial businesses in the country are also increasingly engaging themselves in these efforts, prompted by their CSR obligations. At Bangladesh Bank we are supporting the government and non-government poverty reduction efforts with a financial inclusion campaign to open up and widen access of the poor to financial services. Their scholarship programs for the sons and daughters of the extreme poor are particularly focused on reaching the 'hard to reach'. This is indeed a laudable addressing the 'market failures' or for that matter public failures in the area of educational development for the extreme poor. Responding to their social obligations, banks in Bangladesh are enthusiastically participating in the financial inclusion campaign. Besides traditional direct funding of charitable humanitarian activities they are engaging increasingly in innovative financing schemes for farm and non-farm productive self employment activities of the poor; and the state owned banks with extensive branch networks have embarked on opening of bank accounts with nominal deposits as low as Taka 10 for landless/small farmers and other poor people, wherein the account holders can receive government input subsidies and social safety net benefits. More than nine million of such accounts have already been opened and many more are in the pipeline. Banks have also started introducing cost effective mobile phone/smart-card based remote delivery of financial services. To facilitate the new modes of swift and secure remote delivery of financial services BB has already installed and commissioned a modern payments system infrastructure with fully automated clearing and settlement of inter-bank fund transfers, both paper-based and electronic. The regulatory support to bank-led mobile banking services is yet another bold step in reaching the unbanked with innovative financial services.

*'Eradicating Extreme Poverty: Whose Responsibility Is It?' organized by Shiree, BRAC and British Council, 25 October 2011.


The concerted poverty reduction efforts in Bangladesh are yielding positive results; the 2010 HIES of BBS reports 1.5 percentage point annual decline of population under lower poverty line between 2005 and 2010 (from 25.1 percent to 17.6 percent). The decline is significant, but not a ground for any complacency because as many as 25 million men, women and children in our population are still left behind in extreme poverty and its associated insecurities. There is clearly an imperative of intensifying our efforts manifold in earliest possible freeing up our entire population from the remaining scourge of extreme poverty and hunger. The year 2020 can perhaps be a plausible timeline, this being also the GOB's Perspective Plan timeline for Bangladesh economy to join the middle income country group.

Looking forward, we will need to strengthen individual and collective efforts driven by a common objective of eradicating extreme poverty. These measures will include promotion of pro-poor and inclusive private sector initiatives with greater contribution in corporate social responsibility, ensuring greater access to financial services for the hardcore poor as one of the effective tools for reducing and/or eliminating extreme poverty, ensuring social protection, security and poor's access to government services intended to promote agriculture, SME and other productive sectors, recognizing intergenerational transfer of extreme poverty and integrating support to climate change adaption and actions.

Today's event is an excellent occasion of renewing our anti-poverty vows. In the renewed reaffirmed initiatives we shall be well advised to bear in mind that besides helping the extreme poor with adequate transfers in cash and kind, we must also redress their social alienation and exclusion to protect them from slipping back into poverty and dependency. Our growth and development strategies must remain inclusive and equitable, promoting social inclusion and empowerment of the poor with public provision of human development services in terms of basic health care, education and job training. It is the opening up of blocked advancement opportunities for the poor rather than equality of income that we shall be pursuing in our drive for eradication of extreme poverty with inclusive economic and social growth in Bangladesh.


Challenges and Prospect of PPP Project Development*

From 2006 the IPFF at Bangladesh Bank is active as a long term financing window for infrastructure projects, through a number of Participating Financial Institutions (PFIs). Besides financing, the IPFF is also providing Technical Assistance necessary for project identification, feasibility study and implementation of infrastructure projects. It is well recognized that deficiencies in physical infrastructure are major growth constraints in Bangladesh and other developing economies; and that Public-Private Partnership (PPP) projects can be a major avenue of mobilizing the massive investments needed to address these deficiencies. Accordingly, Bangladesh government's annual budgets and Perspective, Five Year and Annual Development Plan appropriately emphasize PPP projects in development of physical infrastructure. For some time now, the IPFF has been collaborating with the government in providing necessary TA support for PPP project implementation; holding training workshops on project design, appraisal and implementation for the concerned officials in the government ministries, departments and other public agencies.

As for the preceding similar workshop event held in September this year, IPFF has drawn on resource persons from home and abroad for today's workshop sessions as well. Let me take this opportunity of thanking WB and the IIFC for their continuing support, in particular for making available erudite and experienced resource persons for conducting the workshop sessions today. I hope and believe that the workshop participants will not just listen passively to the presentations of the resource persons; and instead engage interactively with them, sharing their own diverse experiences with the diverse PPP projects in different stages of implementation that they are involved in. The problems brought up and the solution options coming out in such interactive dialogues will benefit and enrich both the participants and the resource persons.

*Workshop on Challenges and Prospects of Public-Private Partnership (PPP) Projects organized by WB supported Infrastructure Project Financing Facility (IPFF) at Bangladesh Bank, in collaboration with the Infrastructure Investment Facilitation Center (IIFC), 4 December 2011.


Transforming the Lives of the Poor?*

I would like to thank Professor Robin for deliberation of his in-depth findings on the experimental impact evaluation of an entrepreneurship program that provides asset and training to the poor women in rural Bangladesh. These sorts of experiments are very important and useful in advocating multi-directional programs of the government and the private sector, whose impacts are often seen with doubts due to lack of proper data and research.

The result of this experimental evaluation brings out important findings. Let's have a quick glance at the findings before giving my opinion on the report.

The world's poorest people lack both capital and skills and are trapped in low return occupations. Whether their economic lives can be transformed by programs which attempt to tackle both constraints by providing assets and training to enable them to run small businesses is however unknown. To shed light on this issue InM and IGC have jointly conducted a randomized evaluation of an entrepreneurship program that provides assets and training to the poorest women in rural Bangladesh. The study finds that the effect of the program on occupational choice is ambiguous because the asset transfer creates a wealth effect that reduces labor supply and time spent running small businesses, while training generally increases both. The study also finds that the program transforms the occupational choices of the treated poor women by inducing them to spend more time in self-employment, less in wage labor and increases their labor market participation, leading to a 36% increase in annual income on average. Moreover, the program leads to an increase in wages at the village level and its effects spillover to other poor women who experience an increase in labor supply and income. This is the big joint BRAC/IGC evaluation.

In my opinion, the extent of new employment generation by micro-enterprises remains modest, constrained by limitations of entrepreneurs in managing workers and in willingness to delegate. This indicates, inter alia, the need for external business development / skill development support for the

*'Can Entrepreneurship Programmes Transform the Economic Lives of the Poor?' jointly Organized by the Institute of Microfinance (InM) and International Growth Centre (IGC), 18 December 2011.


micro enterprises. If properly pursued this may open up a new opportunity for development of yet another kind of micro-enterprises called skill development and/or business development centres.

Public institutions like the SME foundations can play major role in bringing down the disincentives and promoting entrepreneurship. Even, central bank can play a pro-active role, which BB is already playing in providing necessary refinance or seed money under its SME financing and Equity and Entrepreneurship Fund initiatives.

The core lesson learnt here is that extending micro-finance alone will do little to improve the lot of ultra-poor who are constrained by poor health, poor education and other debilitating constraints. Micro credit will necessarily need to be preceded by transfers in earning assets and in case for subsistence for some period. Scaling up of productive safety net initiatives effort nationwide can be hastened by public-private partnerships in this social interventions; government (represented perhaps by the SME Foundation/PKSF in Bangladesh) and MFIs can team up to devise programs in which the costs of asset transfer/ subsistence support transfer can be borne by the government.

I am looking forward to initiatives which will be going way further in the coming days, contributing positively to the efficiency of the programs and the institutions combating poverty and promoting broad-based and equitable inclusive growth.


Fostering Biotechnology Research*

Fostering biotechnology research will benefit us and our upcoming generations hugely, by developing tools necessary for coping with the challenges to our near and longer term survival and wellbeing. It has the potential of bolstering food security by developing new bio-pesticides and new drought, salinity, and flooding tolerant food crops varieties that we will need in scenarios of global warming and sea level rise. Biotechnology research can also deliver us added health and longevity by developing new preventive and curative pharmaceuticals. I could go on further about the potential benefits from pursuit of biotechnology research, but it would only be repetitive.

Given its immense potentials, biotechnology research is a leading edge high priority activity in the developed economies, supported by investments both from governments and businesses. It is of course not possible to precisely predict the probability or timing of success of a particular biotechnology research initiative, but episodic evidences indicate a fair percentage of success, often with spectacular returns before long. Biotechnology driven businesses in developed economies employ research activities as key tools for protecting and improving their competitive edge. Even academics are in an advantageous position to sound businesses, especially in a field like bio-technology provided they are prepared to come out of the cosy world of public sector. Take for example, Dr. Herbert Boyer, who was a co-founder of Genentech. There are many professors in IT sector who combine teaching, researching and building companies. The retired ones can do even better. They need both peered financial support. And foundation like CARES can build the bridge.

It seems to me that in Bangladesh we already have accumulated a critical mass of human resources needed for pursuing substantial extent of biotechnology research in various fields, in our universities and government run research establishments e.g. BAO, BRRI, BARI. I can recall as recent examples the development of several new crop breeds and complete genome mapping of jute by Bangladeshi scientists. Private sector businesses can join hands in the biotechnology research initiatives in their relevant fields, on their own or in collaboration with the universities and public establishments. Also, collaboration

*International Conference on Biotechnology organized by CARES, 25 May 2013.


in biotechnology research need not stop at national boundaries, and can extend region wide. I am enthused about this possibility by the presence in this conference of a number of cabinet ministers from our South Asian neighboring countries.

The potential boost to economic growth from investments in biotechnology research cannot be quantified precisely, but examples from countries at leading edge of such research show that these research investments are crucially important for sustaining economic growth and protecting quality of life over the medium and longer run.

Bangladesh Bank's Corporate Social Responsibility (CSR) mainstreaming and Green Banking initiatives are seeking to enhance environmental sustainability and quality of life for the broad masses, attainment of these objectives can be helped by advances in biotechnology research. Bangladesh Bank will, therefore, be prepared to consider helping biotechnology research initiatives drawing such support as feasible from the CSR outlays of the financial sector. In fact, CARES has already received CSR support from one of the financial institutions, and I am confident that similar support will be available if CARES remains focused on the lofty goals set by its social sponsors.

I wish the conference success in generating new enthusiasm and momentum in biotechnology research in Bangladesh and the broader South Asia region.


*Seminar on Objectivity and Positivism in Economic and Financial Reporting organized by Eastern Bank Limited, 25 May 2013.

Objectivity and Positivism in Economic and Financial Reporting*

Bangladesh is an adolescent democracy on path of inclusive and equitable socioeconomic growth towards a broad based well-being and eventual prosperity for all citizenry. We are at an early stage of learning curve both as a pluralistic democracy, tolerant and accommodative of diversity of views and perspectives, and as an economic growth engine, speedily and satisfactorily reconciling the conflicting interests of diverse societal stakeholder groups that normally emerge continually in the growth processes. In both these respects, how ongoing events and developments in our socioeconomic life get reported for mass dissemination matters importantly, helping or hindering progress on path of inclusive equitable growth and development.

I am therefore happy to see two key relevant aspects of media reporting, objectivity and positivism, chosen for interactive discussion in the seminar on 'Objectivity and Positivism in Economic and Financial Reporting.' The notions of objectivity and positivism are fairly straightforward; but like all other private and public institutions, professional and social groups in the society exposed to pressure group influences from various directions, the media often finds itself challenged by interest group pressures in maintaining objectivity and positivism. Financial sector institutions and their regulators also face such pressure group influences from diverse directions in their day to day decision making. Objective, unbiased reporting of aberrant events in news media helps expose the unhealthy influences and prevent their recurrence; while slanted, biased reporting can act in collusion with the undesirable influences, trying to cover up or gloss over the misdeeds. Positivism in reporting takes care of avoiding alarmism and sensationalism, putting the reported events in the appropriate local, regional or global context and highlighting episodes of success and progress.

Justice and fairness in decision making in the face of pressure group influences depend crucially on adherence to the ethical moorings of codes of conduct of every profession, including the financial services industry and reporting thereon. Maintaining positivism is easier when reporting is unbiased and not slanted in favor of particular interest groups; but it is not enough for


positivism to stop there, it needs also to proactively highlight the aspirations and initiatives of the underprivileged social groups, now being drawn into the government's inclusive growth efforts, supported by our banking sector's central bank guided shift of focus towards socially and environmentally responsible financing practices also merit being highlighted by positivist economic and financial reporting.

I certainly look forward to successful outcome of today's seminar deliberations in sharpening awareness of and urge for enthusiasm about objectivity and positivism in our economic and financial reporting. Such interactive deliberations can indeed be helpful for both the financial services industry and the media community in facing up to and resisting undue, unjust pressure group influences. I would like to conclude here on a positive note, recalling that we need not despair about not winning every battle every time or about things not improving spectacularly overnight.

Everywhere in the world this is a continuous struggle in which we lose only when we give up efforts, giving in to threats and temptations of the pressure group influences. I am confident that we will not give up and hence keep our struggle on for a just and equitable society and economy.



Challenges and Dynamics of Social Accountability*

First of all, I would like to thank the event sponsor 'Manuser Jonno Foundation' for arranging this conference on such an important topic like social accountability. I am happy to recollect my deep association with MJF and participation in various capacity in its campaign for RTI. I remember I participated in a number of events including some of the international ones sponsored by MJF leading to formulation of draft RTI. I also worked very closely with MJF and advocated jointly for the pro-poor budget. The ideas of budget Sahaj Path, budgets for the children, women and physically challenged originated from this campaign. I am sure that this conference will create an opportunity for various stakeholders like civil society members, print and electronic media, academia, government officials, elected representatives and community members to discuss and share their views on various perspectives, challenges and dynamics of social accountability.

Social accountability emphasizes the notion of corporate accountability. As per SA8000 'Social Accountability' is based on the principles of international human rights and norms. As it can be applied worldwide to any company in any industry, it is an extremely useful tool in measuring, comparing, and verifying social accountability in the workplace. It measures the performance of companies in eight areas important to social accountability in the workplace: child labour, forced labour, health and safety, free association and collective bargaining, discrimination, disciplinary practices, working hours and compensation.

There are a couple of issues like transparency and responsibility that require special attention to complement to-day's topic of social accountability as transparency, responsibility and accountability go hands in hands. We have heard many dimensions of transparency from Dr. Ifftekharuzzaman of Transparency International of Bangladesh-raising demand for good governance and transperancy, ill effects of corruption, creating opportunities of people for participation in development and governance. Let me now take this opportunity

*International Conference on 'Social Accountability in Practice: Lessons, Challenges and Way Forward' BRAC Centre Inn, Dhaka organized by Manuser Jonno Foundation on 8 June 2013.


of giving you a brief glimpses of the directions in which our engagements in transparency and social responsibility are progressing in the banking sector of Bangladesh. We have made huge progress in digitizing almost all the services of central bank by heavy investment in IT infrastructure and human resources development. All operations of BB including recruitment, transfer, tendering, budgeting, accounting, banking supervision, open market operations, payment systems, procurement, etc are online. The automated clearing house, online CIB, electronic fund transfer, Enterprise Data Warehouse, Open Data Initiatives, the core banking solutions like SAP are only a few examples of our recent drives towards total transparency of our system. At Bangladesh Bank (BB), we have for some years now been pursuing instilling of socially responsible business ethos in our financial sector institutions by mainstreaming of CSR in their corporate goals and objectives, guiding them into in-house and community based CSR engagements; towards fostering inclusive, equitable and sustainable socioeconomic growth and development. We now have a separate Department of Green Banking and CSR at BB which is steering our campaign on socially responsible financing. Besides, to name a few, BB has recently taken some noteworthy steps from the CSR points of view like two new circulars regarding relaxation of rescheduling and classifications of loans. BB has taken initiatives under CSR activities of Banks and FIs to support the victims and volunteers of Savar Tragedy such as, collection of one day salary of the employees of BB, scheduled banks and FIs, formation of a fund Taka 1.9 billion by the BAB, ABB and BLFCA, to donate the aggregate collection to 'Prime Minister's Relief Fund' and to honor the volunteers by arranging employment for them. BB has also taken initiatives to form a permanent 'Disaster Relief Fund' by BAB and ABB and support Bangladesh Fire Service and Civil Defense and other relevant government agencies for their capacity building.

Banks and financial sector institutions in Bangladesh are maintaining generally benign and safe working environment. Community engagements of financial sector's CSR programs focus both on one-off emergency humanitarian and disaster relief, and on continuing support of initiatives widening advancement opportunities for the weaker, less fortunate population segments in terms of healthcare, education and training. Besides these engagements involving sizable direct expenditure, CSR initiatives of banks include reaching out to financial inclusion campaigns for the under-served rural and urban population segments with financial services including financing for their productive farm and non-farm micro, small and medium sized enterprises. Their lending support for environment friendlier output practices (in renewable energy, effluent treatment, adoption of energy efficient output processes etc.) have also been growing rapidly. Annual reports of individual banks disseminate information on their CSR activities, and BB has been issuing consolidated annual CSR reports for the entire banking sector. Banks have also embraced green banking with BB's CSR guidance. They are weighing in environmental risks while making financing decisions, and extending funding support for adoption of environment friendly output processes and practices. All banks, state owned and private, local and foreign have been enthusiastic in their CSR engagements. Over the past few years, direct and indirect expenditure of banks on CSR initiatives have increased manifold. Latest available data show that direct CSR expenditure of all banks increased by


5.5 times to Tk. 3046.7 million in 2012 from Tk. 553.8 in 2009. Bangladesh Bank believes in deeper transperancy and wants to remain accountable to the citizens and other stakeholders. We now have a Customers' Interest Protection Center (CIPC) with a hotline '16236' to address bank customers grievances. It works like an Ombudsman and settles hundreds of complaints every month. Our emphasis on IT is also aimed at enhancing transperancy.

I am highly optimistic that the increased 'Social Accountability (SAc)' engagements by the corporate sectors including civil society members, governmental and non-governmental organizations in Bangladesh would foster more inclusive, equitable and sustainable socioeconomic growth and development. The corporate sector in Bangladesh would surely be in healthier state in terms of capital, asset quality, profitability and capacity to manage internal as well as external shocks if higher level of social accountability leads to better governance both in corporates and other organizations. We expect this conference would significantly contribute to beef-up our corporate sectors including governmental and non-governmental organizations' practices of SAc in terms of SA8000 standards which would help us prevent various corporate tragedies like the one we had recently in Savar in addition to make our corporate and govt entities more socially accountable and responsible.

I am delighted to see 'Manuser Jonno Foundation' taking this proactive initiative in promoting Sac by arranging this international conference accompanied by dissemination of a book titled 'Social Accountability and Experience in Bangladesh (both in Bangla and English). I hope this would encourage other business and industry chambers in Bangladesh to ingrain good corporate governance.

The dissemination of this book will definitely enrich the information on social accountability practices and experiences in Bangladesh as it covers a wide range of issues in SAc including the concept, tools and practices of social accountability in Bangladesh. The book lucidly explains different courses of social accountability in Bangladesh by incorporating a critical review of the ways and the types of tools available in Bangladesh. I hope this would be a good source of information for those who want to know further about the state of social accountability in Bangladesh in line with SA8000 standards. I look forward to seeing other business chambers and associations, both financial and non-financial, sponsoring many more such appropriately structured SAc promoting activities.


Safe Working Environment for RMG Sector*

The appallingly high fatalities and human distress in the recent Tazreen Fashions fire and Rana Plaza building collapse tragedies have brought home the pressing urgency of comprehensively and concertedly addressing issues in ensuring safe working environment for apparels sector workers in Bangladesh, for substantial visible progress in the near term. Bangladesh's external development partners and our apparels sector's foreign large buyers are extending their hands in these efforts of our apparels manufacturers, government, and civil society organizations.

As ever, the Japanese government has been among the earliest ones extending helping hand, proposing financing support in the key areas of retrofitting or rebuilding of apparels factory buildings found unsafe in safety assessment. Over the past few weeks officials of JICA and the Japanese Embassy at Dhaka have worked together with our Finance Ministry's Banking Division, Housing and Public Works Ministry's PWD, Bangladesh Bank, BGMEA and BKMEA in chalking out a program of financing the retrofitting/rebuilding of unsafe BGMEA/BKMEA member apparels factories. Costs of relocation of factories in unsafe rented premises, and costs of procurement of safety equipment will also be eligible for financing support under this initiative. To ease stresses from cost burdens of retrofitting/rebuilding the factory buildings, banks participating in this initiative will lend to the factories for this purpose at interest rate not exceeding ten percent per annum, against which banks will draw refinance from BB out of the JICA funds at a concessional interest rate of five percent, leaving for them adequate interest income margin of up to five percent. Also, the financing will be long term, of up to 15 years including a two year grace period.

The financing initiative is expected to commence soon on a pilot scale, with JICA fund contribution of Taka 1.0 billion. BGMEA/BKMEA member apparel factories employing 100-2000 employees will qualify for financing of up to 90 percent of the retrofitting/rebuilding costs assessed by joint team of PWD and JICA engineers. The amount of financing for any individual factory shall not

*Meeting on Expression of intention regarding the proposed JICA funded financing initiative for retrofitting/rebuilding of unsafe apparels factory building: BB Governor's observations 11 July 2013, Jahangir Alam Conference Hall, Bangladesh Bank.


exceed Taka 10.0 crore or 0.10 billion. A five year time frame is envisaged for disbursements of JICA funds against the retrofitting/rebuilding loans by participating banks. The process will start with joint assessment of the factory building by a team of JICA experts and trained PWD engineers on the need of retrofitting/rebuilding and related cost implication. Utilization of the loans will also be monitored jointly by PWD and JICA experts. In addition, the financing banks will also monitor the pace of implementation within their usual framework. Other details of modalities are being finalized for approval of a Steering Committee to be chaired by Secretary, Banking Division of the Ministry of Finance. I hope JICA will be forthcoming with further funds for this purpose as and when found necessary; and I believe door for participation of other development partners in this initiative will also be left open.

I am happy to see BB involved in this initiative in the crucial role of administering the JICA fund disbursements. I am confident that the new JICA supported initiative will be warmly and eagerly received by our apparels manufacturing sector, and that it will make a major pioneering contribution towards upgrading the safety and working conditions for our apparels sector workers.

Initiatives by Bangladesh Bank for the victims of Savar Tragedy

1. Bangladesh Bank along with Commercial Banks and NBFIs has donated around Tk. 90 crore to the Prime Ministers' relief Fund. Recently CEO of Woori bank Bangladesh, Eung Joon Kim also donated Tk. 20 lacs to the Prime Ministers' relief Fund.

2. Employees of Bangladesh Bank and all scheduled banks/NBFIs have donated one day salary to the Prime Ministers' relief Fund for the help of Savar tragedy victims.

3. BB has collected the list of victims who have died, injured and volunteers from the Army head quarter and banks immediately after completion of salvation works.

4. A Disaster Management and Social Responsibility Fund has been created By Bangladesh Bank and formed a high powered committee headed by Deputy Governor including members from BAB, ABB and BFILS to supervise the CSR activities of Banking Sector. Bangladesh Bank Initially alloted Tk. 5 crore to the fund. Each year Bangladesh Bank will contribute the same amount to the fund. In addition commercial banks and NBFIs will also contribute to the fund.

5. Initiative has been taken to provide the treatment facility and arrange the replacement of artificial limbs to savar victims who are under treatment in CRP, Savar and other hospitals.

6. Initiative has been taken to honor and support by different facilities to the volunteers of Savar tragedy by Bangladesh Bank and will provide job to the volunteers by the different banks as they require according to their qualifications.

7. Special program have been initiated to policy formulate and for capacity building for the Safety of RMG sectors' and compliant base RMG industrialization.


RMG Sector Safe Working Environment Program

Ready Made Garment (RMG) and knitwear sectors are the most important sectors which have played a vital role in achieving high economic growth and earning a majority of export earnings in Bangladesh. At the same time, the sectors have provided an employment opportunity to more than 3.5 million workers among which 2.8 million are women with low literacy and less opportunity for education. By providing an employment opportunity for those women, both the sectors have contributed to social development as well as economic and industrial development in Bangladesh. Thus, the importance of both the sectors are beyond comparison among other sectors and industries in the country.

However, after the Savar tragedy in April, 2013, people in Bangladesh and abroad have started to cast a suspicious eye on RMG and knitwear sectors in Bangladesh. Both the Sectors have been criticized for putting higher priority on profit-making without paying due attentions to securing safe working environment for its workers. Other critics mentioned that there was lack of awareness among concerned entities (such as RMG and knitwear enterprises and government agencies) to follow the rules given by labor and construction laws. However, one thing is certain that the most vulnerable players in both the sectors, namely the RMG and knitwear sector employees working under harsh working condition, have suffered (and will suffer) most from such an incident.

Now, Bangladeshi people are concerned that the incident might undermine the reputation of RMG and knitwear sectors that have contributed to earning export revenues and provided a great number of employment opportunities for Bangladeshi people. They are worried that international buyers may suspend or shift their imports of RMG and knitwear goods from Bangladesh, which might slow down the process of economic and social development brought about by both the sectors as a main driver. If the vitality of both the sectors slows down, it may cause a remarkable adverse effect on the Bangladesh economy and society.

Challenges and Way Forward

Facing the critical situation surrounding RMG and knitwear sectors in Bangladesh, Embassy of Japan (EOJ); Japan International Cooperation Agency (JICA); Bank and Financial Institutions Division (BFID), Ministry of Finance; the Governor, Bangladesh Bank and the Project Implementation Unit (PIU) of Financial Sector Project for the Development of SME Enterprises (FSPDSME) of Bangladesh Bank (BB) and the Public Works Department (PWD) under the Ministry of Housing and Public Works have taken an initiative to formulate a special program by integrating the schemes of two ongoing JICA projects (namely "Financial Sector Project for the Development of Small and Medium-sized Enterprises (FSPDSME)", the ODA loan project implemented by Bangladesh Bank and "Capacity Development on Natural Disaster-Resistant Techniques of Construction and Retrofitting for Public Buildings in the Peoples' Republic of Bangladesh (CNCRP)", the Technical Cooperation Project implemented by the Public Works Department) to address the challenges which RMG and knitwear sectors in Bangladesh are facing right now. Bangladesh Garment Manufacturers and Exporters Association (BGMEA) and Bangladesh Knitwear Manufacturers and Exporters Association


(BKMEA) expressed their willingness to cooperate with the above-mentioned actors to tackle the difficulties surrounding the sectors, RMG and knitwear enterprises and their employees.

By combining JICA's ongoing financial and technical assistance scheme, it could be possible for all the concerned organizations to take the first step to address one of the most critical issues surrounding both the sectors(such as safe working environment for the workers) in a timely manner. Although this Program alone may not able to solve all the issues surrounding both the sectors, it could make a difference in raising awareness about the importance of safe working environment in RMG and knitwear (and other) sector in Bangladesh by showing the concerted initiatives, responsibilities and determinations shared by public, private and international development partners which have been working for the betterment of the people of Bangladesh.

Objective

To rebuild the international reputation of RMG and knitwear industries in Bangladesh and creating better work place for the associated workers by introducing the good practice of improving safe working environment in the both the sectors in an urgent manner.

To demonstrate the seriousness of the issues surrounding both the sectors by sharing the responsibility between Government of Bangladesh, private sector and international development partners.

Program Description

The overall scheme of this Program is to provide financial support for the RMG and knitwear enterprises which undertake the safety assessment of the building (or factory) conducted by JICA experts and PWD engineers, working in the CNCRP. During this process, JICA experts will provide training for PWD engineers (and possibly other engineers from BGMEA and BKMEA (and other organizations) to conduct a sound safety assessment which complies with international standards. JICA has trained 20+ engineers in PWD for more than two years, and is planning to further enhance the capacity of engineers in PWD and other organizations by taking advantage of the training experience in the past and partnership which it has nurtured during this period.

Financial support will be provided for these RMG and knitwear enterprises through the Two-Step Loan (TSL) scheme under FSPDSME to implement retrofitting and/or rebuilding work and incorporating safety equipment. Details of the activities in this Program are given below:

1 Minimum 10% of the sub-project cost is financed by the SME applicants under the conventional FSPDSME scheme. 2 Interest rate is to be determined by arrangement between PFI and Borrower in compliance with the rules and regulations prevailing in Bangladesh. 3 Repayment period is up to 8 years with maximum two year of grace period under the conventional FSPDSME scheme.


Up to 1 billion BDT (up to 100 million BDT per applicant/factory)

Enterprises working under RMG and knitwear sector, who has a membership of BGMEA and/or BKMEA and is ready to carry out the assessment and subsequent retrofitting of its factory.

a. Retrofitting / Rebuilding of the factory (building)

b. Purchase of equipment required for safe working environment c. Relocation of the factory (and equipment)

a. BGMEA and/or BKMEA submits the supporting list of vulnerable factories (enterprises) to FSPDSME. FSPDSME-PIU shares the supporting list with Participating Financial Institutions (PFIs) under the FSPDSME project (BD-P67).

b. RMG and knitwear enterprises on the supporting list submit a preliminary application for the safety assessment and financing support of his/her facilities.

c. FSPDSME-PIU will send this application to JICA for the safety assessment. The assessment team (led by JICA Experts of CNCRP and PWD Engineers) will assess the building and provide a report on the necessary actions to be taken and possible cost implication.

d. RMG and knitwear enterprises submit loan application along with this assessment report to PFI.

e. PFI follows its due diligence, appraises, decides and sends it to FSPDSME-PIU for allocation of prefinance.

f. FSPDSME-PIU will make sure that the loan proposal is submitted as per the assessment given by JICA/PWD Experts before providing a loan.

g. FSPDSME-PIU will disburse loan in three tranches to each RMG and knitwear units through PFIs based on the progress of works provided that CNCRP expert & PWD engineers' and PFI engineer's certificates will have to be submitted to PIU in different stages of works.

h. JICA will monitor the on lending loan proceedings and loan operation to the RMG and knitwear units as per the agreed terms and condition of the FSPDSME project. With the help of CNCRP experts & PWD engineers JICA will also provide a certificate of completion to FSPDSME-PIU/PFI that the works have been done as per the report of the assessment team.

100 percent of the sub-project cost will be financed under this program.1

Interest rate will be fixed on the basis of banker-customer relation. However, a maximum of 5 percent spread on BB financing rate can be charged by the PFIs.2

Collateral will be decided by PFIs, following the BB prudential guidelines.

Up to 15 years repayment period with 2 years grace period (assuming the retrofitting or rebuilding must be completed in 2 years), which will be decided by PFIs.3

All the procedures for loan and activity will be as per the operating guidelines under FSPDSME (See the flow chart below)

Total Fund Amount:

Eligible Applicant:

Eligible Portion to Finance:

Financing Process:

Coverage on each sub-project:

Interest Rate:

Collateral

Repayment:

Procedure

1.

2.

3.

4.

5.

6.

7.

8.

9.

Financial Support for RMG Enterprises


4. Timeline

A) FSPDSME-PIU, BB and JICA will take this suggested program to the Steering Committee of the FSPDSME BD-P67 Project and obtain the approval from the Committee.

B) Upon the endorsement from the Steering Committee, JICA, BB, PWD and BGMEA/BKMEA will make Memorandum of Understanding (MOU) on the technical assessment, supervision and monitoring of the retrofitting (rebuilding) work. The draft MOU will be shared among the agencies for their comments and will be signed as soon as possible. The duration of this Program shall be 5 years from the date of signing the MOU.

C) Public announcement will be made jointly by EOJ, JICA, BFID BB, PWD and BGMEA/BKMEA

D) Circular for the Program will be delivered to PFIs by FSPDSME-PIU.

E) Loan Operation will be executed in accordance with the BB guidelines and the operating guidelines of the FSPDSME project.

Once the preliminary application was shared with BB (FSPDSME-PIU), the assessment team (led by JICA Experts and PWD Engineers) will assess the buildings and provide a report on the necessary actions to be taken and possible cost implications. RMG and knitwear enterprises will retrofit (or reconstruct) the building based on the recommendation given by the report with a financing from the TSL program.

While conducting safety assessments, JICA experts will provide training for PWD engineers (and possibly other engineers from BGMEA, BKMEA and other organizations) to conduct a sound safety assessment which complies with international standards.

PWD Engineers will be responsible for supervising and monitoring during the implementation (of the retrofitting or rebuilding) phase.

Assessment of the factories (buildings)

Technical Training for engineers

Monitoring of assessment

1.

2.

3.

Technical Cooperation and Training

*IFSB-BB Seminar on the Prospects and Challenges in Development of Islamic Finance for Bangladesh 23 September 2013, Hotel Purbani International, Dhaka.


Developing Islamic Finance in Bangladesh*

I am very happy to have IFSB co-hosting with us this important seminar on Prospects and Challenges for Development of Islamic Finance in Bangladesh. The seminar is of topical relevance for our financial market, where Islamic banking is outpacing conventional banking in growth, and where need for new Islamic financial products and services are arising from continued steady growth of our economy even amid the lingering global slowdown in economic growth.

The value driven, speculation-averse, risk-sharing features of Islamic finance attribute greater inclusivity and stability supportiveness to it. Islamic banks and financial institutions fared better than conventional ones in the last global financial crisis, which may be a reason why we see niche presence of Islamic financing widening steadily in non-Muslim countries including the advanced western economies.

Islamic finance commenced in Bangladesh in early nineteen eighties with just one Islamic commercial bank. By now there are eight Islamic banks run wholly on Shariah principles. Besides, as many as seventeen conventional banks, including one globally active foreign bank, are running Islamic banking branches or windows side by side with their conventional banking. Further, approval requests of a number of conventional banks for their conversion into wholly Shariah based Islamic banks indicate robust customer demand in Bangladesh for Islamic financial services.

Barring one exception of a small sick Islamic bank in process of restructuring, the Islamic banks in Bangladesh generally have higher capital adequacy ratios and lower non performing loan ratios than their conventional banking counterparts. Aggregate assets and deposits of Islamic banks in Bangladesh have nearly doubled in the last four years; by the end of 2012. Aggregate assets and deposits crossed trillion Taka threshold, comprising around a fifth of total banking sector assets and liabilities. This share of Islamic banking looks set to grow further with time, given its faster growth than conventional banking.

The inclusive nature of Islamic banking is evidenced in their growing and already significant engagement in agricultural, SME and microfinance, so far


without any refinance support like those available for conventional banks. Lately, BB has taken a move for structuring some appropriate Shariah compliant SME refinance support line for the Islamic banks. Apart from Islamic banking, Takaful or Islamic insurance is also now gaining ground in our financial market.

Challenges, of course, are also coming hand in hand with the ongoing growth trends and the emerging new growth prospects. Designing and introducing new Shariah compliant versions of conventional deposit and loan products tailored to the need of our financial market require ingenuity as well as thorough understanding of relevant Shariah principles and practices; appropriate risk management norms and standards are needed for the new Shariah compliant financial products and services, risk mitigation requires developing of new Shariah compliant variants or substitutes of their conventional financing equivalents.

Over years BB and Islamic finance market participants have worked together in developing a fairly comprehensive set of norms, guidelines and regulations. The core standards developed by IFSB on various aspects of Islamic finance have been crucially helpful in this important work. As of now we are still to have a well functioning interbank Islamic money market for efficient day to day liquidity management by Islamic banks; A proposal for a new Shariah compliant short dated Treasury bill for this purpose is awaiting government approval.

Sukuk, the Shariah compliant long term fund raising instrument is already in extensive use in the Middle East and East Asia. This instrument is likely to be very useful for financing of Bangladesh's much needed infrastructure projects. Other Islamic finance products and services already in use elsewhere can usefully be tested and tried in Bangladesh. Regulators and market participants from incipient Islamic finance markets elsewhere can likewise benefit from knowledge about the Bangladesh experience. A global network of mutual learning among regulators and participants of Islamic finance markets in different countries may be a useful tool for fast buildup of know how in Islamic finance.

I heartily thank the IFSB, and its Secretary General Jaseem Ahmed personally, for co-hosting this important seminar with us. I wish the visiting resource persons from abroad an enjoyable stay in Bangladesh, I would urge the participants to take full opportunity of engaging interactively with the resource persons in the seminar sessions.

With its ethical, inclusivity promoting and stability enhancing attributes, Islamic finance undoubtedly bears promise of playing major beneficial role in our socio economic development. Let me conclude here looking forward to the best success for the seminar, and also voicing one caveat for our Islamic finance market participants, that they must exercise utmost caution in steering clear of any involvement with extremist dogma driven influences aiding or abetting terrorism; meticulously adhering to AML compliance routines prescribed by BB's FIU.


Strengthening Trade Linkages with NRBs*

NRB Bank Limited is the second new bank sponsored by non-resident Bangladeshis making its debut in Bangladesh banking scene. The dominantly private sector led Bangladesh economy is growing rapidly under the government's dynamic leadership. Sustaining and further accelerating this growth pace require top of the range, competitive financial services for businesses and industries, linking them efficiently with global financial markets for trade settlements and for accessing investment funds. The other urgency is for the financial services in Bangladesh to be socially and environmentally responsible, inclusively reaching out to all productive initiatives of all population segments. Since the last round of licensing new banks in 2001, expansion of capital base of our banking system has lagged the rapid growth of real sector corporates, so much so that in many cases the single borrower exposure limits of all banks taken together do not match the financing needs of the larger corporates.

In this context the government and Bangladesh Bank arrived at a consensus about adding to the banking sector capital base by licensing a limited number of new banks, carefully chosen on the basis of standing, reputation and capabilities of their sponsors in addressing the multifaceted needs of our growing economy. Applications from NRB sponsors got due preference in Bangladesh Bank's rigorous screening processes not only because they are bringing in equity infusion from abroad, but also because of their potential in forging and strengthening trade and investment linkages of Bangladeshi businesses with the NRBs and their host country economies. The oral, audiovisual and live video presentations that we have heard and seen in today's opening event heartens and convinces me that the sponsors of the new NRB Bank Limited will proactively pursue fulfilling all these expectations, partnering in Bangladesh economy's growth path of fastest feasible poverty eradication.

Besides providing state of the art financial services to businesses, industries and well off individuals in urban centers, I expect the new NRB Bank Limited with its modern new IT base to engage substantially in financing agricultural, SME and

*Opening Ceremony of NRB Bank Limited 28 May 2013, Pan Pacific Sonargaon Hotel, Dhaka


environmentally beneficial projects, where necessary using mobile phone/ smart card based remote delivery of financial services; optimally utilizing financing resources to help promote inclusive broad based growth rather than in financing risky speculation or wasteful conspicuous consumption.

The BBS estimates Bangladesh's per capita GNI to have risen to USD 923 in FY 2013 from USD 840 of FY12, hastening an early passage through the middle income country group income threshold. Remittance inflows from NRB's have been contributing substantially to this rising trend of per capita GNI. I am looking forward to the newly opened NRB Bank Limited helping further facilitate and accelerate this contribution and I am looking forward also to significant role of this bank in expanding and strengthening trade and investment ties of Bangladesh with the NRBs and their host communities in UK and USA.

As with all banks, Bangladesh Bank's supervision will remain quite demanding on the new ones in respect of quality of governance, transparency and regulatory compliance; and our helping hand of support and facilitation for business expansion will remain extended towards the banks that remain proactive in inclusive, socially and environmentally responsible banking. Let me conclude here on this mixed note of caution and reassurance, wishing the new NRB bank Limited and its sponsors god-speed.


*National Conference on "Recognition of NRBs and Supportive Organizations in Bangladesh" organized by Centre for Non Resident Bangladeshis, Pan Pacific Sonargaon Hotel, 17th August, 2013

NRBs: Our National Heroes*

First of all, I would like to congratulate 'Centre for Non-Resident Bangladeshis' for organizing this conference on "Recognition of NRBs and Supportive Organizations in Bangladesh". I feel honored to be present at this conference which I believe will help us explore the overall contribution of NRBs and supportive organizations in developing Bangladesh economy.

Bangladesh is, of course, on the move despite undesirable political tensions, particularly selfinflicting shutdowns and some infrastructure constraints. Bangladesh can certainly boast of a lot of success stories over the past 40 years since its independence, for example, in attaining high, sustainable economic growth and reducing poverty with significant improvement in all socioeconomic indicators envisaged in MDGs. Some of these success stories are also replicable in many other developing countries. International media and top notch economists including Nobel laureate Professor Dr. Amartya Sen have taken note of this outstanding performance of Bangladesh. No doubt Bangladesh is now put in the potential star performing Next-11 group by Goldman Sachs. One of the pivotal factors behind these success stories has been the direct and indirect contributions of NRBs. Because of their relentless hard work Bangladesh has already become one of the major remittance recipient countries in the world (7th in 2012 according to the World Bank). Remittances in Bangladesh now stand around 10 percent of GDP, rising from 5.0 percent of GDP in the beginning of 2000s. Annual average growth in remittances has increased significantly from 14.8 percent in the 1980s to 19.4 percent in the 2000s. Over the past 4 years (FY 2009-13), remittance inflows in Bangladesh have grown around 11.0 percent on an average, whereas the other Asian countries grew at 7.1 percent (World Bank). The latest trend is even better.

Despite adverse impact from the global economic crisis and political turmoil in the Middle East, the inflows of remittance maintained healthy long-run growth. The financial and external sector of Bangladesh remained resilient in the face of recent global financial crisis and economic slowdown mainly for these


inflows. The inflows of remittance in FY 2012-13 were around 14.46 billion, a 12.59 percent growth over the previous fiscal year. Aided by robust growth in exports and remittances, and moderate growth in imports, foreign exchange reserves in Bangladesh are now more than USD 16.0 billion. Despite being a trade deficit country, Bangladesh, the only country in south Asia which enjoyed positive balance in current account during the last five years particularly due to continuation of impressive growth in remittances. This demonstrates inherent strength of our external sector and hence that of our currency. But there is no room for complacency as we need more of foreign reserves if we compare the same with India's size of reserves. We need this to maintain the on-going confidence of the foreign direct investors who see Bangladesh as a potential destination.

Remittance is one of the major drivers of economic development. The contribution of NRBs has been at the heart of the policy framework in our mission of becoming a middle income country within next few years. They made significant socioeconomic impact on community as well as household levels through improved living standard, higher investment in children's education, increased spending in healthcare and social security, higher investment in income generating activities like SMEs and other agro-processing activities, outsourcing various international services, upholding social norms and values and so on.

NRBs have always been very creative entrepreneurs and since they know Bangladesh so well, they are able to locate appropriate channels for disbursing their money for productive initiatives. As happened in China and India, our non-resident entrepreneurs also deserve strategic support of the state in addition. Supportive organizations can play an important role with an appropriate design through which remittances would directly be invested in our development works. Local NGOs can play an active role in this regard in terms of accumulating and distributing NRB funds for such development activities in remote areas.

Given the importance of NRBs' contribution, the Board of Bangladesh Bank has recently approved licensing of three new NRB sponsored commercial banks. Foreign exchange brought in as capital for the new NRB banks and the foreign-exchange deposits they are likely to attract will further strengthen the country's balance of payments. Simultaneously these banks will help facilitate FDI inflows particularly from NRB entrepreneurs. Indeed, they have already started design new NRB-friendly financial products. I am sure many of you will agree with me that Bangladesh offers excellent investment opportunities for NRBs. Virtually all industrial sectors in Bangladesh are open for investment by NRBs. They can play a significant role in technology transfer in the form of training for skill development and management efficiency. They can contribute significantly in mitigating investment-saving gap with new financial engineering know-how and products.

Also, NRBs can engage in profitable investment by setting up cost effective labor intensive export manufacturing bases in Bangladesh producing for markets in host countries and elsewhere. Again they know better taste and life-style of the consumers of the host countries. In fact, some of them already invested heavily in the areas of aviation, hotels & restaurants, fish and agro-processing industries. Different savings instruments such as nonresident foreign currency deposit, US Dollar premium bond, wage earners development bond, etc., are


available for investment by NRBs. BB has taken additional measures to attract NRBs to participate in these trading platforms which are now mostly digitized. The government is encouraging public-private partnership (PPP), tax holiday and other exemptions on investment to boost investment by NRBs. They can surely contribute in developing our upcoming special economic zones that will build the solid foundation for the potential foreign direct investment and confident. Our NRB entrepreneur will be path finder for other foreign direct investors who are eager to shift from China to Bangladesh for our cost competitiveness.

Bangladesh Bank has taken major initiatives to ensure easy and hassle free remittance transfer. It has simplified approval policy of drawing arrangements between foreign exchange houses and domestic banks. Thirty-seven banks have already been permitted to set up 1084 drawing arrangements with 288 exchange houses all over the world for collection of remittances. Responding to this arrangement, some banks have already established exchange houses abroad. BEFTN and mobile banking are operating in full-swing to ease remittance disbursement. Micro Finance Institutions (MFIs) are also involved as partners in smooth delivery of inward remittances. Banks are now using the branch networks of the MFIs and Post Offices as the sub-agent for remittance distribution. Mobile banking services have also been made available to our remitters. All these payment facilities have virtually eliminated the informal remittance inflows. Besides, government has taken initiative to send worker abroad under its supervision by only 33 thousand taka with creating a low cost fund facility by setting up a bank named 'Probasi Kollyan Bank' and the first of this kind of public-led manpower export is already flowing to Malaysia. The government is desperately trying to expand its labor market particularly into the East Asian countries, including Indonesia, Singapore and Brunei. Thanks to Arab spring, the salary structure in the Middle East has also been improving for our NRBs. This too has enhanced the level of remittance inflow from Middle East countries. In view of removing all sorts of irregularities, cheating and forgery from the manpower export market, the cabinet of the GoB has recently cleared the 'Oversees Employment and Migrant Workers Act 2013' to be placed in Parliament for final approval. All these indicate greater political and institutional commitment for improving the living and job condition of our hard working NRBs. They are our natural national heroes and we will continue to salute them.


*Speech delivered at IBA Graduation Ceremony, 30 October 2009.

Promoting Inclusive Socio-economic Development*

I am much gratified and thankful to the IBA for this opportunity to be with you at your graduation ceremony from this well-renowned center of excellence of the University of Dhaka. Dear graduating students, you entered the IBA through a very rigorous selection process; and after being well equipped by the erudite IBA faculty with perspectives, tools and ethical grooming for creative, innovative engagements in steering businesses and economic activities, you will now be stepping into workaday world in corporate, academic or whatever other fields you choose.

Just as we have high confidence in your capabilities and on the excellence of the academic and attitudinal grooming you have received in your alma mater; our expectations are very high about your professional and ethical contributions in fostering inclusive growth, well-being and prosperity of the society that has nurtured you. I believe the erudite IBA faculty has made sure that you keep abreast of topical issues and challenges facing us as a low income developing country and as a member of the global community; we expect your prompt responsiveness with creative, innovative roles in addressing these local and global challenges. Let me take this opportunity to recall a few of these issues and challenges.

The recent global financial turmoil triggering mass scale wealth destruction, institutional collapse and job losses across mature developed economies, eventually bringing in a global downturn, arose largely from serious ethical and management lapses in many high-profile globally active financial institutions. Short term gains for powerful coteries in control took precedence over longer term institutional and systemic viability, with attendant gross dereliction in risk management. Keep this episode alive in your memories to remain aware of your ethical obligation as business managers to the longer term interests of ordinary shareholders and others in the broader stakeholder community.

Within Bangladesh, around a fifth of the population is still in extreme poverty and deprivation. Despite sustained GDP growth, hunger and food insecurity in Bangladesh is rated as alarming. In your roles as tomorrow's business leaders, you will need to fulfill your corporate social responsibility in promoting inclusive


socio-economic development, by helping open up blocked advancement opportunities for the disadvantaged segments of our population. Environmental sustainability has remained a neglected area in Bangladesh and elsewhere, despite superficial lip service; the cumulative neglect now putting low altitude tropical and sub-tropical countries like ours in dire threat from climate change and attendant sea level rise. As tomorrow's business leaders it will be imperative upon you to put environmental sustainability and carbon neutrality topmost in priority in all your business activities. As you may already be aware, 'socially and environmentally responsible competition' and 'socially responsible market economy' are new fusions in current development thoughts, to obtain the best from competition while also minding the obligations of inclusiveness and sustainability in the growth processes.

As you enter a new life let me conclude by congratulating you, heartily on this wonderful occasion of your securing a cherished degree from a cherished institution. I am with all others present here in the high hope and confidence that you will emerge triumphant in the challenges you face; making your alma mater proud, and making the country you grew up in happier and more prosperous.


*The DHL-Daily Star Bangladesh Business Awards 2010, 16 April 2010.

Fostering Innovation and Creativity in Business*

I am indeed honored to be invited in this ceremony conferring Bangladesh Business Awards to a select number of distinguished individuals and organizations in the business world in Bangladesh in recognition of their exemplary performance, both in usual financial measures and in terms of social and environmental responsibility. In our lifelong pursuits of individual and collective prosperity, due recognition of examples of excellence bolster our confidence in aspiring for ever higher prosperity with social justice and equity underpinned by high moral and ethical values. I congratulate the Daily Star and DHL managements for their success in building up a tradition, now in its tenth year, in searching for and eulogizing excellence in the business world in Bangladesh.

The attainments of our private sector businesses in generating output, employment and income have certainly been impressive. The public sector dominated post-liberation economy has transformed radically, the private sector today accounts for over nine-tenth of consumption and investment demand in the economy, by now sixteen-fold larger. After building up from scratch a spectacular global export success story in apparels and textiles, our private sector businesses are in forays for new breakthroughs in diverse new directions, including in export of services and of capital goods such as like oceangoing vessels.

There is however no room for complacency. Benefits of growth remain unevenly distributed, over a fifth of our population remains mired in extreme poverty and deprivation, disadvantages persist for women and small ethnic minorities. Many other developing economies including our large next door neighbor have not only grown faster but also have promoted women empowerment and ethical justices, particularly in their businesses. In business culture and practices we are admittedly still some distance away from establishing solid traditions of socially and environmentally responsible corporate citizenship with transparency and adequacy in disclosures, sound corporate governance and CSR performance. Good businesses are scrupulous in fulfilling obligations to the government in taxes and other dues; to stakeholders including


creditors, employees, shareholders and clients in upholding and promoting their legitimate interests; and to the broader society in proactivity for righting the social wrongs of poverty, deprivation and environmental degradation. In retaining edge over domestic and external competitors, businesses need also to nurture and foster innovation and creativity.

The jury panel kept in mind all these required attributes in picking up awardees of today's ceremony, selecting in the outstanding personality category Mr. Nasir Choudhury, a veteran insurance industry entrepreneur for his lifelong contribution; in the outstanding woman in business category Ms. Kaniz Almas Khan, a beautician spawning a thriving beauty-care industry and championing women's empowerment; in the business person of the year category Mr. Md. Saiful Islam, a socially responsible leather and shipbuilding sector entrepreneur pioneering export of ocean going vessels from Bangladesh; in the financial institution of the year category Pubali Bank Ltd., an erstwhile state-owned bank now well run by private sector board, with the largest private sector rural bank branch network reaching out to farmers and rural SMEs; and in the enterprise of the year category Square Pharmaceuticals Ltd., a soundly managed corporate leading in domestic and export markets in pharmaceuticals, agro vet products, pesticides, herbals and neutraceuticals.

I heartily congratulate the distinguished awardees, and I hope the recognition of their attainments will trigger competition in others to aim at and attain yet higher levels and standards of financial, social and environmental performance. Bangladesh Bank in its modest capacity as a firm and facilitating regulator will continue to support the process of unfolding of all the above qualities of the business world for which many of you have been duly recognized and awarded.

*HSBC Export Excellence Awards 2009, 21 April 2010.

Diversification of the Export Basket*

I am happy to be invited to this award ceremony to accord recognition for export performance excellence in 2009, both in volume of exports and in other attributes of socially and environmentally responsible business including tax and environmental compliance, clean credit record. The range of five performance categories for the awards is quite comprehensive; besides the usual criteria of export volume, export growth rate and financial outcomes, also covering diversity in inputs sourcing and output marketing; employment generation, local input use and CSR performance; and special achievement landmarks in process and product innovation, environment friendliness.

Over the past several years our exporters have successfully established a firm footprint of Bangladesh in the global trade map; efficiency and quality in output for local consumption has also improved, as producers for local markets have embraced the more efficient production processes and practices of export manufacturers. Our exporters showed commendable resilience in sustaining double digit export growth in FY 09 in the global downturn when most other countries suffered steep decline. Lingering demand weaknesses in the traditional Western markets have affected our exports in FY 10, but in recent months export performances are on recovery path with diversification to newer markets including Japan and China in the East, and also to newer items like ocean going vessels; with likelihood of FY 10 export growth at high single digit level. I am confident that over the medium term our exporters will succeed in establishing Bangladesh as a strong brand name in global exports, gradually moving up the value chain but also preserving market share at the lower end, which protected us well from being grievously hurt by the recent global downturn.

Recognitions like today's awards boost the morale of awardees in aspiring for yet higher attainments towards this objective; and of others in emulating the successes of the awardees. I heartily congratulate HSBC for this award initiative.

HSBC already has a commendably substantial share in handling the country's export business (about nine percent of total exports, including 40 percent of EPZ



exports); but I believe with its global stature HSBC can do more in supporting our exporters, not just by way of local currency financing but with help in searching and accessing new markets for export of outputs and sourcing of inputs and capital goods, at favorable interest rates on borrowings and LC confirmation lines.

The first ever sovereign credit ratings of Bangladesh by S&P and Moody's have both been hearteningly favorable; placing us ahead of all South Asian neighbors excepting India. I would urge our exporters and bankers to be proactive in negotiating/renegotiating the interest rates and charges on foreign borrowings and LC confirmation lines, down to levels commensurate with the favorable sovereign credit ratings and stable outlook. Banks should also motivate exporters to get themselves rated by local or international credit raters; favorably rated exporters will have lower risk weights and capital charges on their borrowings, enabling banks to lend them at lower interest rates.

Having negotiated and secured lower borrowing costs as suggested, exporters will need to remain alert about preserving and further bettering the newly earned favorable sovereign credit ratings, because borrowing costs will go up with any rating downgrade or negative change in outlook. Both S&P and Moody's have mentioned the government's low revenue base and the country's narrow export base (very high dependence on apparels) as rating constraints. Alongside revenue reforms a good tax compliance culture will ease the former, while diversification of the export basket will ease the later. All of us will need to remain proactive in our respective roles in attaining these objectives.


*Certificate Awarding Ceremony of the Advanced Training Course on Econometric Analysis for Bangladesh Bank Officials, organized by Economic Research Bureau of Dhaka University held on 30 April 2010.

Developing Knowledge on Quantitative Research*

I would like to congratulate all my fellow colleagues on their successful completion of the training program on advanced econometric analysis and would also like to extend my heartfelt thanks to the management of bureau and all the facilitators for conducting such a valuable training on quantitative research. Any central bank has an increasing demand for staff members with well command over quantitative methods.

In-depth and up-to-date knowledge of advanced quantitative tools is needed to produce relevant background analysis which is used to assist monetary policy decisions. A central banker particularly connected with monetary and other policy formulation and implementation, needs to have clear understanding of the complex behavior of financial and macro-economic variables. I have high expectations that this hands on training will enhance analytical capabilities of our officers through acquainting them with latest statistical and econometric tools and will help them develop knowledge in directions needed by Bangladesh Bank.

You are aware that along with performing core central banking roles of maintaining price stability and financial system viability, Bangladesh Bank has been supporting the priority sectors such as agriculture and SMEs as part of its objective of attaining and maintaining socially inclusive economic growth. Accordingly, Bangladesh Bank has been formulating and implementing policies and programs containing instructions and guidance for reaching out to small farmers and SMEs. I expect that the researchers of Bangladesh Bank will focus not only on financial and macroeconomic issues but also will cover the areas of financial inclusion so that the excluded group of our country can benefit from their work. Bangladesh Bank, in future, will extend all sorts of support for betterment of research as well as for enhancement of the technical capabilities of its researchers so that they can maximize their potentials.

Finally, I would like to thank the organizers for their efficiency and effort to make this training programme valuable to our researchers in developing their technical skills. I sincerely hope that we will be able to create a long lasting relationship with the Bureau of Economic Research in the area of capacity building of the central bank.


*Certificate Awarding Ceremony of Training Course on Renewable Energy Finance, 5 August 2010.

Renewable Energy for Sustainable Economic Progress*

We all know that renewable or 'green' energy is now at forefront of the country's priorities for environmentally sustainable economic progress. I was pleased to know about this training course on financing renewable energy being organized, and pleased still more being invited to its certificate awarding ceremony.

We urgently need much more energy for our households,manufacturing units and commercial establishments; and we need this energy produced in ways that minimize carbon emission and climate change effects. Although Bangladesh contributes very little to the renewable energy for power generation (only 2 percent), the government has a vision of enhancing this to 10 percent by 2020. When our neighbors are doing far better, we too are showing our interests in renewable energy sector, particularly in the solar and bio-gas sub-sectors. Bangladesh Bank is promoting financing for solar; biomass and other renewable energy projects with refinance support lines for the lenders. The government is also providing support, including tax/duty waivers for the projects.

Renewable energy financing will be needed both at the producers' end as large scale project finance and at the users' end as loans to households and businesses procuring and installing renewable energy units for own use. The project loans and some of the user loans will be needed for tenors longer than the average tenors of usual fund sources (deposits, borrowings) of the lenders, resulting in asset liability maturity mismatches that can create occasional liquidity difficulties. To get around the mismatch problem, loans in the renewable energy sector can be structured and documented in ways permitting subsequent repackaging and offloading to other investor classes as marketable securities rated by external rating agencies. In the securitization processes, some of the banks and financial institutions will need to assume a market making role, maintaining active liquid market in the securities. Developing securitization processes in our market will be important in fostering its longer term project financing capabilities, and I feel it is important for training courses on project financing to include adequate content on securitization concepts and modalities; besides tools and techniques of structuring project financing packages.


Bangladesh Bank will be happy to do all it can to support securitization in the local market, towards augmenting liquidity for longer term project financing.

I am happy to see in the contents of the present course carbon trading under the Clean Development Mechanism (CDM) which provides a trading window for carbon credits, easing the typically higher cost burdens of renewable energy projects. Large emerging market economies like India and China have already benefited handsomely from carbon trading; hastening efforts of Bangladeshi green energy projects for benefiting from this opportunity window brooks no delay. I am sure this course will indeed be a vital resource for project developers who want to learn how to structure bankable renewable energy deals.

I look forward to seeing more training courses like this organized and held in the coming months; perhaps in longer durations to cover related issues in greater depth than possible in a two-day format. Also, I look forward to seeing in future courses some contents aimed at creating enthusiasm for embracing the renewable or green energy options in our economy, to the utmost extent feasible.


*Workshop on New INCOTERMS 2010 and CDCS Certificate Award Ceremony, organized by International Chamber of Commerce (ICC) - Bangladesh, 7 December 2010.

Integrating Bangladesh with the Global Markets*

I would like to take this opportunity to congratulate all the qualified bankers on their successful completion of the Certified Documentary Credit Specialists (CDCS) examination and would also like to extend my heartfelt thanks to ICC Bangladesh for organizing this important workshop which has attracted many BGMEA members as well.

ICC Bangladesh has been working closely with the government of Bangladesh in reforming laws and regulations governing businesses and in liberalizing trade policies towards greater economic integration with global market places. ICC has been promoting foreign trade and investment through reviewing trade policies, conducting business dialogues, seminars and workshops, harmonizing trade laws & regulations, legal reforms and so on. The continuous effort of business leaders and experts from ICC in establishing business stances on trade and investment policy issues as well as on vital technical and sectoral issues including financial services, information technologies, telecommunications, environment, transportation, competition law is really praiseworthy.

I believe that exporters and importers of RMGs, pharmaceuticals, leather, and jute goods, transport companies, freight forwarders and other third party service providers will really benefit from the outcome of this workshop.

I am happy to learn that Incoterms which was introduced in 1936 specifying responsibilities of buyers and sellers in delivery of goods under sales contracts has come up with its latest version Incoterms 2010 (eighth revision) to be effective from 1 January 2011. The new version has brought about major changes taking into account the spread of customs-free zones, increase in use of electronic communications, concerns about security following 9/11, latest developments in commercial practices, and updates of the earlier rules.

I believe Incoterms 2010 is more precise than its older versions in reflecting current trade practices and is more user-friendly with expanded list of explanations for users. It is therefore crucial to understand the new Incoterms for accurately negotiating or quoting sales contracts.

Finally, I would like to thank the organizers once again for organizing this valuable workshop and hope that the participants will be able to play significant role in promoting international trade and integrating Bangladesh with the global markets. Bangladesh has been picking up both exports and imports at an accelerated proportion in recent months.

Bankers have a significant role in maintaining this momentum. This initiative of ICC will certainly enhance the capacity of our bankers and entrepreneurs, who have participated in this training workshop.


*BB Governor's views on '20 years celebration of Bank of Tokyo-Mitsubishi UFJ',23 January 2011.

Japan: A Consistent Development Partner*

I am highly pleased that Bank of Tokyo-Mitsubishi UFJ is going to celebrate its completion of 20 years in Bangladesh.

I came to know that Bank of Tokyo-Mitsubishi UFJ is the largest and leading bank with over 800 branches in Japan and it is the ninth largest bank measured by assets in the world having operation in more than 40 countries worldwide and has been performing significant role in the financial sector.

In Bangladesh, the bank commenced its operation in 1990 and it has been following the functionaries of Japanese Official Development Assistance (ODA) business comprising with Japanese Yen credit Projects, Japanese grants and Japanese Debt Relief Grants, which was waived during 2004/5 by the Japanese government.

We have a very close relationship with Japan. This is not only a matter of today. We have a historical linkage as well. On 1st September 1938, Rabindranath Tagore wrote a letter to the great poet Noguci by expressing belief of two nations in a fundamental moral social structure and aspirations for establishing a noble relationship in the Asiatic continent. We are fortunate that Japan has consistently been acting as our development partner, a major investor country and as a single largest donor country through extending its support to our core infrastructural development. You have already come to know that Japanese government is going to contribute in building our long desired Padma Bridge Project by giving a large amount of aid. Bank of Tokyo-Mitsubishi has been playing an excellent role in facilitating this development co-operation between two countries.

Apart from this, the frequent visits at the political level between two countries are a testimony to the existing excellent bilateral ties between two nations. Recently Japanese Prime Minister Naoto Kan has also assured our Prime Minister of standing by us in our quest for a 'Digital Bangladesh' and achieving the position of a middle-income country by fulfilling 'Vision 2021.' Our Prime Minister also conveyed Bangladesh's support for Japan's claim for permanent membership of the United Nations Security Council.


I believe, Bangladesh has now become one of the most attractive and convenient destination for foreign investment, in spite of recent global recession and changed circumstances Bangladesh has been able to keep standard growth rate. But I like to mention here that there lies huge trade imbalance between Bangladesh and Japan. Thus, now we are seeking greater market access and for this purpose we cordially request the Japanese entrepreneurs to import more raw jute, leather, frozen food, chemical products, pharmaceuticals and our non-traditional items, such as fruits, vegetables etc. for reducing the existing trade imbalance. We have also requested the Japanese authority for providing us with their latest ICT support to accelerate our government's endeavour of becoming Digital Bangladesh. According to Moody's and S&P's rating, Bangladesh is only next to India in South Asia in terms of economic health. Yet another projection is that Bangladesh will be one of the 30 large economies of the world by 2030.

In this connection I would like to say that Bangladesh Bank in co-operation with BOI is trying to contribute substantially to create lucrative environment for both local and foreign investment by simplifying foreign exchange rules, regulations and policies. Japan believes that environmental protection and economic development can be simultaneously pursued and it welcomes Bangladesh's environmental protection measures against global warming.

I would like to extend my heartiest congratulations to the Bank of Tokyo-Mitsubishi particularly Mr. Takashi Morisaki, Managing Executive Officer and CEO for Asia and Oceania of this institution for his diversified leadership and guidance that help the bank to go forward with successful completion of twenty years in Bangladesh. I also want to thank H.E. Tamotsu Shinotsuka, Japanese Ambassador in Bangladesh for his kind co-operation and cordiality in strengthening existing relation between our two countries.

Finally, I hope that the Bank of Tokyo-Mitsubishi will move forward with its consecutive success and significant role which will contribute a lot to the overall development of our economy and for the betterment of the people of Bangladesh. I would like to assure you of our best possible co-operation in future and look forward to continuing cordial relationship by giving impetus to all endeavors taken in facilitating our business relations.


Private Sector Development*

It is indeed a great pleasure for me to be able to attend the closing session of this important event. BEI has been organizing this type of program for a couple of years in association with Institute of Governance Studies (ISG), BRAC University and Korean Development Institute (KDI). Bangladesh Investment Climate Fund (BICF) also plays an important role to make this event happen. I thank you all to run this program. The theme of this program is truly interesting and I believe that findings of the course will provide us with some insights regarding private sector development. Most of the participants of this course are from civil services while others are from trade bodies, BOI and SME foundation.

Four areas are covered in the workshop which are as follows:

J Improving Foreign Exchange Regulations

J Simplification of Work Permit

J Integration of Licensing System or back-end link for licensing process

J Introduction of pre-paid utility's metering system

The participants underwent theoretical courses as well as they have visited some institutions to have real life exposure. I have learnt that one official from Bangladesh Bank came to deliver a presentation on foreign exchange regulation and the participants also visited BB. I can assure that all sort of cooperation from our end will be provided to facilitate this capacity building effort.

All must be waiting for the certificate awarding ceremony after series of presentations and feedback sessions from the morning. So, I do not want to take much time. I just want to mention one thing: findings of the program should be communicated with the policy makers. I have learnt that some regulatory reforms initiated from the previous Core Group exercises already took place. Definitely the participants played significant role as envisaged, but there are lots more to do. Any change initiative will not be successful without creating a sense of urgency among the stakeholders.

*Closing and Certificate Awards Ceremony of 'Executive Core Group Program (ECGP)', Hosted by Bangladesh Enterprise Institute (BEI), 11 June 2011.


In brief, there should be a feel everywhere that to do things in a better and effective manner change is inevitable. Moreover, there has to be an apex body/committee which will be center of various activities and ultimately steer the change initiative. Otherwise the synergy will not be there and the stakeholders benefit will be minimal.

In Bangladesh Bank, we already initiated the change process and as a part of this, Strategic Plan 2010-14 was finalized and a Strategic Planning Unit was established. In terms of foreign exchange regime, starting from current account convertibility of taka in early nineties, many steps have been taken to ensure business and investment friendly foreign exchange environment. Many more changes are also proposed in draft Foreign Exchange Regulation Act which was forwarded to Ministry of Finance. I hope that the findings/recommendations of this course will be shared with us so that we can look into it while formulating new circulars/directions regarding foreign exchange transactions. To facilitate financial transactions, we have already introduced Bangladesh Electronic Fund Transfer Network (BEFTN) and jointly organized a seminar with DCCI on 'Challenges and Opportunities of Electronic Payment.' A National Payment Switch will also be established to facilitate settlement of card payments.

I hope that the participants have been highly benefited from the program. I also hope that this effort will continue and will act as a positive catalyst for much endeavored and discussed private sector development.


Improving Corporate Governance*

It's indeed a great pleasure for me to attend this closing ceremony of the second Corporate Governance Board Leadership Training of Trainers (ToT) for grooming up a crop of trainers to train and activate bank directors in their roles and responsibilities in improving corporate governance practices in banks. It is heartening to see that the second round of the training following fairly quickly after the first round in March 2011. I hope the trainers' batch trained in the first round are already active on the ground contacting boards of individual banks and arranging appropriately structured training briefing sessions with them. I am looking forward to formation of an adequate crop of trainers with Toolkits from these training rounds actively engaging with individual bank boards on a sustained, continuing basis. Only that way can we expect to bring about significant visible improvement in the multifaceted dimensions of corporate governance in our banks; equipping these better in coping with new challenges in enhancing capital adequacy, safeguarding liquidity and solvency by continuous upgradation of risk management, and identifying vulnerabilities with stress testing routines. You are aware of recent pressures in the domestic credit markets from excessive dependence of businesses and entrepreneurs on banks for both their working capital and investment financing needs. Credit demand has swelled from sudden sharp surge in imports driven in large part by new project investments. The pressure has heightened the importance of awareness of bank directors about the need of maintaining a sustainable asset-liability mismatch level, to avoid running into liquidity difficulties. I am pleased to inform you that of late the board directors have started applying their minds on these issues and trying to respond positively. I hope this awareness building will continue in the coming days as well. And this will, hopefully bring win-win outcome for all the stakeholders in the banking sector.

I would like to thank BBEI, IFC and GCGF for their very laudable initiative of training of trainers too help bank directors better understand their roles and responsibilities in safeguarding legitimate interests of their shareholders with stable, sustained growth. I congratulate the batch of trainees completing their training sessions today, and with them Godspeed in carrying forward in their due role towards attaining the objectives behind the entire BEI-IFC-GCGF initiative.

*Closing Ceremony of the Training of Trainers workshop on Corporate Governance Board Leadership for the Banking Sector, 23 June 2011.


*IFRS Training, organized by The Institute of Chartered Accountants of Bangladesh (ICAB), 1 July 2011.

Financial Reporting Standards and Practices*

As a statutory self-regulatory body of accounting professionals in Bangladesh, ICAB bears the big responsibility of upgrading our local accounting and financial reporting standards and practices as early as feasible to those required by International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS).

I am happy to be informed of ICAB's progress in ongoing and new initiatives in this direction; among others including the ICAB-ICAEW twinning project, issuance of a new set of financial reporting standards for SMEs in Bangladesh based on IFRS, Quality Assurance Visits under the Quality Assurance System, and the round of IFRS training courses for accounting professionals in financial and non-financial corporates now being kicked off.

You are aware that investment and output activities in Bangladesh have picked up sharply in FY-11, with our economy stepping on to higher growth trajectory, on track to reach the middle income country group threshold (GNI of USD 996 per capita) by 2015. Sustaining this growth momentum needs attracting substantial new foreign equity and debt inflows in our investment projects. For investment projects in Bangladesh to attract joint venture partners and lenders from abroad, or for our corporates to attract equity subscriptions from abroad, their financial statements and disclosures will need to earn credence and confidence of foreign lenders and equity investors. Clearly, this will require accounting and auditing standards and practices closely conforming to IAS and IFRS. Weakness in this area is one main reason why FDI inflows in Bangladesh are quite low compared with our neighboring economies. I would take this opportunity today to urge our accounting profession and all our financial and non-financial businesses to rise the challenge of attaining IAS and IFRS compliant standards and practices sooner rather than later. I can assert from BB's own experience that a swift transition to full IAS and IFRS convergence will be onerous but entirely feasible; we at BB initiated the process in 2003 and completed it successfully within a year.


I would like to express my appreciation for ICAB's Quality Assurance Initiative. Pursued in right earnest, this should lead to major improvement in both accounting and corporate governance practices in our businesses. I apprehend however that this initiative has still a long way to go; given recently reported instances of very dubious accounting and auditing employed in feeding IPO equity price bubbles unethically enriching influential quarters, with the eventual market crash impoverishing small investors. I would urge upon the ICAB and the entire accounting and auditing professionals that it represents to co-operate whole-heartedly with the concerned regulatory bodies and the government in putting in place legislation/regulations with necessary preventive and punitive safeguards against dubious, unscrupulous accounting and auditing practices.

In conclusion, I would like to congratulate ICAB for its timely initiative in organizing this series of training courses on IFRS. I look forward to its best success in upgrading the accounting and auditing practices in our financial and real sector businesses.


*Certificate Awarding Ceremony of the Advanced Training Course on Social Accounting Matrix for Bangladesh Bank Officials organized by Economic Research Bureau of Dhaka University held on 20 July 2011.

Developing Social Accounting Matrix for Bangladesh*

I would like to congratulate all my fellow colleagues on their successful completion of the training programme on Social Accounting Matrix (SAM) and would also like to extend my heartfelt thanks to the management of Bureau and all the facilitators for helping our researchers acquainting with modern quantitative tools like SAM. Earlier we came to the Bureau for 3rd rounds of training on advanced econometrics. I have heard that selected officials with outstanding performance in those trainings have got the opportunity to enhance their knowledge further with SAM.

SAM is basically a matrix version and exposition of integrated national accounts of current and capital flows of production, distribution and accumulation activities in an economy. Building up SAM requires considerable resources in terms of money and time. Besides, sometimes SAM produces unpredictable results because of incorporation of large dataset into a single matrix. Nevertheless, SAM allows us to understand the structure of the economy and predict what would happen if we expect a shock in the economic system within a general equilibrium framework. Financial SAM is generally more pertinent to a central bank. Many central banks across the globe have developed financial SAM for their own economy. Surely, given available resources, Bangladesh Bank will take the initiative of developing Financial SAM for Bangladesh in future. Those who got this advanced training can play significant role in developing Financial SAM under appropriate guidance.

Any central bank has an increasing demand for staff members with in-depth and up-to-date knowledge over advanced quantitative tools for producing relevant background analysis and assisting monetary policy decisions. Surely, Bangladesh Bank will come back again to the Bureau for future training program on monetary and financial economics so that a central banker particularly connected to monetary and other policy formulation can accomplish a clear perception about the complex behavior of macro variables. We will extend all sorts of support for betterment of research as well as enhancement of the


technical capabilities of our researchers in maximizing their full potentials.

Finally, I would like to thank the organizers for their efficiency and effort to make this training program worthy to our researchers in developing their technical skills. I sincerely hope that we will be able to create a long lasting relationship with the Bureau of Economic Research in the area of capacity building of Bangladesh Bank.


*Award giving ceremony of the 3rd Citi Financial IT Case Competition, 19 November 2011.

Creating Opportunities for IT Students*

This is undoubtedly a great occasion for all of us to celebrate the award giving ceremony of 3rd Citi Financial IT Cases Competition (CFICC). This competition is a great initiative and I congratulate all those involved in the hard work of organizing such an event.

CFICC gives the opportunity to the young, and talented IT and business students from different public and private universities to work together and develop innovative software and IT solutions to meet the increasing demand of the country's financial sector. I believe some of these micro initiatives can become macro solutions and can change the country at all levels of society. It's high time that ideas get translated into innovations. We need to look no further than the way the introduction of computers has made the banking industry so much more effective; and now as second and third generation IT innovations emerge we are moving ahead with an online Credit Information Bureau, with mobile phone banking and many other initiatives. One that I think will help students like you a lot is the recent launch of our Open Data Initiative where you can now download a wide range of economic data from our website into Excel files and avoid all the bureaucratic steps of writing us letters to access information.

Nowadays, it is easier for the Bangladeshi students to acquire IT knowledge as formal education as it is available in our universities, colleges and schools. Moreover the informal interaction through e-mail and internet browsing do not need any formal training but they do have positive spin-offs for employers as young people who are joining as professionals are increasingly IT savvy. Along with that I feel proud when I see students developing interesting software so much so that they can become globally marketable and outsource their services. Some of them have even won a few international programming competitions and brought laurels for the country. We need to increasingly market our services overseas given our population base, and I look forward to the IT sector contributing more and more to our exports and foreign exchange earnings. And Bangladesh's banking sector has been playing a facilitating role in promoting


software export and I feel we can do more for this emerging sub-sector. Bangladesh Bank will be more than happy to play its expected regulatory role in this context.

The key to the sustainable development of Bangladesh and more specifically the growth of the IT sector, depends ultimately on the development of human resources. In order to do this we need to sharpen both our IT knowledge base as well as knowledge of English and the social skills required to succeed in a competitive global market. This sort of competition also provides incentives for innovation as well as the opportunity for young people to interact with the industry and I hope that financial institutions and ICT industry leaders will come forward to scale up some of the projects from this competition.

But above all I want to make a plea. A plea to the younger generation to be proud of your country and to work for its betterment. Bangladesh has come a long way since independence and despite all our problems we have managed to halve the rate of poverty in the last twenty years. I am sure the younger generation will be able to take this country forward and I encourage you to do so with all your creativity, passion and talents.

Let me conclude by again expressing my heartfelt thanks and deep appreciation to all those who worked hard to make this event successful. And, of course, congratulations to the winners and also to those who did not make it onto the winner's podium, I am sure this experience has enriched you professionally and you will try again next time!


*Regional Standard Setters (RSS) Conference 2011, held at Dhaka on 28 November 2011.

Improving Financial Reporting Standards*

I am very delighted to be with you in this South Asian regional conference on convergence of accounting, auditing and financial reporting standards. Even as an outsider to the accounting profession, I see this is a subject of far reaching importance in forging and consolidating South Asia's investment and trade relationships within itself and with the rest of the world.

In its emerging role as a significant hub of global growth, South Asia will need to attract massive volumes of equity and loan investments; intra-regional cross-border investments within South Asia will be growing; and South Asian investments outside the region will also be rising gradually with increasing openness. Intra and extra-regional trade will expand in tandem with increasing openness in investment relationships. For these intra- and extra-regional investment and trade relationships to thrive, regional and international harmonization and convergence of accounting, auditing and financial reporting standards and practices are important requisites. I am much heartened to see the ICAB and SAFA alert and active in this direction; amply evidenced by their invitation of IASB Chairman Mr. Hans Hoogervorst to deliver the keynote address in this conference.

At Bangladesh Bank we have adopted IAS as our accounting standards and IFRS as our financial reporting standards as far back as 2003; and we are looking forward to the work in ICAB towards full convergence of the local accounting and auditing standards in our financial and real sector including the SME sector with the international best practice standards. This is important because foreign investors will feel comfortable with joint venture and lending relationships with their counterparts in Bangladesh only when they are satisfied about the completeness and transparency of financial statements and disclosures of the local partners. Bangladesh Bank is gradually imposing more demanding financial reporting and the disclosure requirements for banks and financial institutions in closer convergence with international best practice standards; and would be happy to support ICAB in taking the convergence processes faster forward in the coming days, in the real as well as the financial sectors. In fact, an initiative is


already underway between Central Bank and ICAB in fast tracking these convergence processes. I am sure this will have far reaching impact in improving the financial reporting standards in Bangladesh.

It is also relevant to bear in mind that the international standards themselves are not necessarily cast in stone, and need to evolve with the changing global business and financial environment. One evidence still fresh in memory is in the difficulties compounded by fair value accounting rules in the recent global financial crisis when markets and their pricing mechanisms froze up altogether.

Global and regional dialogues on accounting and auditing standards are therefore ongoing processes, and I look forward to seeing our ICAB and SAFA pro-actively and productively engaged in these regional and global dialogues. Such dialogues can greatly facilitate the quest for smooth transition paths from extant local practices in country jurisdictions to the prevailing international best practices.


*Dr. Atiur Rahman, Governor, Bangladesh Bank received the prestigious Indira Gandhi Gold Plaque 2011 in Kolkata, India on 7th May 2012 in recognition of his significant contribution to international co-operation towards human progress. Justice Asok Kumar Ganguly, Hon'ble Chairperson, West Bengal Human Rights Commission presented the award to Dr. Atiur Rahman at the 228th Annual General Meeting of The Asiatic Society in presence of Professor Pallab Sengupta, President, Asiatic Society and Professor Mihir Kumar Chakrabarti, General Secretary, Asiatic Society at the Vidyasagar Hall of the Asiatic Society, Kolkata.

Introduced in 1985, past awardees of the Gold Plaque include among others ex-Swedish premier Olof Palme (1985), Dr. D.S. Kothari (1986), Nobel Laureates Mother Teresa (1987), ex - Secretary General of the United Nations Dr. Javier Perez de Cuellar (1988), Dr. Nelson Mandela (1989), Rev Desmond Tutu (1990), Dr. Karan Sing (1991), Smt. Aruna Asaf Ali (1992), Yasser Arafat (1993), Professor Amartya Sen (1994), Aung San Suu Kyi (1995), Shri K. R. Narayan (1996), Dr. Ali Akbar Khan (1997), Dr. Gabriel Garcia Marquez (1998), Gunter Grass (1999), Cuban revolutionary Dr. Fidel Castro (2000), musician and composer Pandit Ravi Shankar (2001), Father of the Green Revolution M.S. Swaminathan (2002), shehnai maestro Ustad Bismillah Khan (2003), sculptor Somnath Hore (2004), Shri K. R. Narayan (2005), Professor of Buddhist and Tibetan Studies Dr. Ernst Steinkellner (2006), painter and writer Sri. Dinkar Kowshik (2007), Indian Finance Minister Sri. Pranab Mukherjee (2008) and

Acceptence Speech of Indira Gandhi Gold Plaque*

I accept with deep gratitude and utter humility the Indira Gandhi Gold Plaque for 2011 awarded to me by the Asiatic Society in appreciation of my humble efforts towards advancement of human progress through international co-operation.

It is a deeply moving experience to see my name added to the elite company of the very distinguished luminaries awarded with this Gold Plaque in the preceding years. Of further significance to me is that the award bears the name of late Indira Gandhi. She was instrumental in helping hasten victory in our 1971 liberation war by letting Indian soldiers shed their blood side by side with our valiant freedom fighters, by extending massive humanitarian support sheltering and feeding millions of refugees from Bangladesh, and by mobilizing moves in all



important world capitals for stopping of occupation army's genocide in the country. I take this opportunity to pay homage to her soul.

Far more than a personal reward and recognition, I see this prestigious award as a recognition and reaffirmation of our high priority for human progress through poverty eradication and social empowerment of the disadvantaged groups in our communities, opening up advancement opportunities equitably for all.

Throughout my career in socio-economic development research, teaching and latterly central banking, I have consistently been driven by a strong urge of triggering and deepening civil society activism for human welfare through people-to-people contact and cooperation; in communities within and across our national borders. My visits to India to this end have for example been literally numerous.

In my current assignment as central bank Governor, as also in my earlier roles as commercial bank board member/chairman I have persistently acted to steer traditional urban elite based banking away towards broader, deeper financial inclusion of the underserved poor; and also towards financing environmentally sustainable pursuits for safeguarding our future generations against ecology and climate change threats. Our initiatives in Bangladesh for inclusive, equitable socioeconomic growth and development are receiving resonant echoes from other similar initiatives in our region and elsewhere; today's award in recognition of my efforts provides me huge new impetus and inspiration for continuing our journey onward.

I can never thank the Asiatic Society enough for the honor and recognition bestowed today on my humble efforts. I would love to see our sustained individual and collective efforts towards enrichment of our economic and social lives remain ever blessed by the best wishes and prayers of each and every one of you in this distinguished audience.

*HSBC Export Excellence Awards 2011, 25 May 2012.

Exporters Establishing Credential for Bangladesh*

This is the second time I am attending HSBC's Export Excellence Award event, happy to see it continuing as a tradition of extending recognition and acclaim for pursuit of excellence in export, an endeavor that demands the best of skills and efforts in competing with the rest of the world.

Over the past decades our exporters have established solid credential for Bangladesh in global trade as a leading player in apparels and textiles exports, despite not being endowed with advantage of local sourcing of primary inputs. The key to success here was skillful exploitation of the quota advantages from the erstwhile Multi Fibers Agreement (MFA). The timely innovation of back to back import letters of credit against export orders helped crucially in spawning our apparels export sector from scratch, amidst acute scarcity in foreign exchange prevailing in its early years. The competitive efficiency of our apparels exports have outlasted the MFA and continued flourishing in the post MFA quota free WTO regime. Our apparels export sector has earned the same renown for driving down global prices of apparels as China earned for other manufactured goods. Our exporters are also appropriately responding to recent heightened concerns of foreign buyers about eco-friendly sustainable production practices and decent work environment with fair wages for labor.

We are seeing dynamic enthusiasm and growth thrusts in other non-textile non-apparel export sectors as well, with exporters making successful inroads with newer goods and services into newer markets. Our young educated crop of tech savvy youth have earned recognition from global buyers of IT enabled services, freelancing successfully amidst limitations in connectivity and other facilities. Our shipbuilders and light engineering goods manufacturers are already in the global export market. Growing horticultural exports have brought in higher quality and yield in local production, aided by adoption of improved production practices. Efficiency gains in the export sector have spilled over also in output practices in manufacturing and services catering to local demand.

Our exporters resiliently maintained positive export growth even at the height of the global financial crisis. In coping with the current demand weakness


in traditional Western markets the exporters are being supported by existing government subsidies, pre-shipment export credit at lower interest rate and by competitiveness from exchange rate flexibility. I am confident that aided by these support measures, our exporters will show the same resilience and ingenuity in overcoming the transient slowdown; deftly utilizing the new opportunities opening up in tariff concessions/exemptions in many of the fast growing emerging market economies including China, India, Malaysia.

Award events like this acclaiming excellence in export performance are important confidence boosters inspiring aiming at newer heights of performance. My heartiest congratulations for the exporters to be awarded today, they will be the examples and guiding lights for others to emulate. Sponsoring of the award event on a continuing basis by HSBC, a globally active international bank signals its abiding support commitment to global growth aspirations of our exporters.

International banks like HSBC can go far beyond mere extension of pre and post shipment export credit in supporting longer term growth aspirations of our exporters. With their extensive knowledge of local conditions in various countries and regions of the world they are well placed to help our exporters locate new export prospects and investment partners from abroad. They can also encourage and help our exporters adopt international best practice standards in corporate governance and financial disclosures, guiding them towards securing credit ratings high enough to enable accessing debt and equity capital on favorable terms from international markets.


*Certificate awarding ceremony of CanCham CSR training seminar, 29 January 2013.

Instilling Socially Responsible Business Ethos*

My thanks, particularly to High Commissioner Heather Cruden, for the invitation to this concluding ceremony of the CSR training seminar for CanCham member companies. I feel enthused a lot about CSR related events in Bangladesh; particularly because at Bangladesh Bank we have for some years now been pursuing instilling of socially responsible business ethos in our financial sector institutions by mainstreaming of CSR in their corporate goals and objectives, guiding them into in-house and community based CSR engagements; towards fostering inclusive, equitable and sustainable socioeconomic growth and development. Let me take this opportunity of giving you brief glimpses of the directions in which these engagements are progressing.

Banks and financial sector institutions in Bangladesh are maintaining generally benign and safe working environment. New in-house CSR engagements are therefore focusing mainly on adoption of energy efficient, eco-friendly internal processes and practices. There is however some internal CSR issues like gender fairness in working conditions yet to be fully addressed, interalia regarding length of paid maternity leave, access to crèche facilities for children and so forth. BB's CSR guidance circulars therefore flag relevant gender issues in the to-do lists.

Community engagements of financial sector CSR programs focus both on one-off emergency humanitarian and disaster relief, and on continuing support of initiatives widening advancement opportunities for the weaker, less fortunate population segments in terms of healthcare, education and training. Besides these engagements involving sizable direct expenditure, CSR initiatives of banks include reaching out in financial inclusion campaigns to the under-served rural and urban population segments with financial services including financing for their productive farm and non-farm micro, small and medium sized enterprises. Banks have also embraced green banking with BB's CSR guidance; they are weighing in environmental risks while making financing decisions, and extending funding support for adoption of environment friendly output processes and practices (renewable energy generation, effluent treatment and so forth).


All banks, state owned and private, local and foreign have been enthusiastic in their CSR engagements. State owned banks have by now opened around 9.6 million new no-frills bank accounts for small farmers and other individuals of small means, free of charge, with nominal initial deposits as low as Taka ten. Over the past few years direct expenditure of banks on CSR initiatives have increased manifold; indirect engagements by way of financial inclusion initiatives reaching out to income and employment generating farm and non-farm SMEs, and their lending support for environment friendlier output practices (in renewable energy, effluent treatment, adoption of energy efficient output processes etc.) have also been growing rapidly. Annual reports of individual banks disseminate information on their CSR activities, and BB has been issuing consolidated annual CSR reports for the entire banking sector.

CSR engagements have helped our financial sector itself in good shape during the global financial crisis and in the subsequent still ongoing global slowdown. Besides keeping our financial sector free of speculation driven toxic assets, the inclusive, output supportive orientation of financing has helped it both in supporting output growth and in upholding domestic demand in our economy, hastening decline of poverty and deprivation. BB expects that the financial sector embracing CSR ethos and objectives will in turn sensitize and activate its non financial client businesses in CSR commitments and initiatives. I am very heartened to see Can Cham, a mainly non-financial business chamber, taking this initiative in promoting CSR. I hope this sets example for other business and industry chambers in Bangladesh to emulate towards ingraining good corporate governance, of which good CSR performance is a necessary component. Indeed, businesses in Bangladesh and elsewhere will need to hasten establishing good CSR performance track records for holding on to and expanding their customer bases; because consumer lobbies in both developed and developing countries are voicing louder concern and demand for socially responsible performance from producers and providers of goods and services. The Cancham initiative of holding this interactive CSR training session for member businesses could not therefore have been timelier; the 'safe factory' focus of this CSR workshop is very appropriate in the context of compliance deficiencies threatening tariff preferences in some major markets of our manufacturing export sector.

Training sessions like this one should be very useful for initiation of Bangladeshi businesses into CSR engagements in a well structured manner, in line with evolving global guidance and standards from such sources as ISO 26000 and the UN Global Compact. I look forward to seeing other chambers bodies and associations, both financial and non-financial, sponsoring many more such appropriately structured interactive CSR training sessions.

Let me conclude with congratulations to training participants for their interest in a topical issue of crucial importance both for continuing success of individual businesses and for inclusive, equitable and sustainable overall growth and development of the economy. I hope each of the participants will play exemplary roles for others as drivers of CSR initiatives.


*Launching ceremony of the book titled 'Coins from Bangladesh' Sponsored by Standard Chartered Bank 30 June 2013, Ruposhi Bangla Hotel, Dhaka.

Coins Portray Cultural Heritage*

I am really glad to see a foreign bank like Standard Chartered coming forward to bring out a book titled 'Coins from Bangladesh'- a guide to the coins in Bengal, especially circulated in the territory of Bangladesh. With a long presence in Bangladesh which spans over 100 years, Standard Chartered Bank has always been committed to upholding the true essence of this country, its culture and people.

You all know that coins are not only the means of doing business but also part of our culture and heritage. Coin posses' economic worth and at the same time have unique design that depicts the culture of that time. We can be acquainted with the lifestyle, education, culture and various aspects of archaeological developments of human civilization through coins and currencies of various eras. Given the historical value of a coin, Bangladesh Bank has issued a number of commemorative coins marking important historical events which included the 20th Anniversary of Victory Day of Bangladesh, the 1992 Summer Olympic Games, the Silver Jubilee of Independence, the 25th Anniversary of Bangladesh Bank and the International Mother Language Day while taken an initiative to set up a 'Taka Jadughar' which will be a digital modern currency museum' at Mirpur in its training academy campus. To enrich the collection of the museum, currency purchase policies have been formulated. A number of coins and notes of different ages have already been collected from the collectors and individuals. The Archaeology Department has also been requested to share their excess collections with the Taka Jadughar. Among the collected currencies include Bangla old notes, coins of the periods starting from Gupta to Sultani regimes, Mughal and British rules. We have taken enough measures with active support of the well-reputed artists, architects and historians of the country to finish the work within stipulated time.

I would like to thank Standard Chartered Bank and all the others who have worked together to bring this book to life. The book contains images of ancient coins that portray our prehistoric culture and heritage. I am sure this book will fascinate a lot of people with strong cultural diversities that will come out of the coins of different era. The book will also be a piece of our cultural treasure.



*The 4th HSBC Export Excellence Awards 28 September 2013, Radisson Water Garden Hotel, Dhaka

Recognizing Excellence in Export*

I feel honored to be present at this gathering of HSBC's Export Excellence Award event which I believe is continuation of its' tradition of extending recognition and acclaim for pursuit of excellence in export, an endeavor that demands the best of skills and efforts in competing with the rest of the world. I must thank HSBC for upholding such tradition. You will be happy to know that Bangladesh has already crossed the lower middle income country group per capita GNI threshold (USD 1036) reaching to USD 1044 underpinned by six-plus percent sustained and stable real GDP growth for more than a decade with agriculture sector becoming almost self-sufficient.

With robust domestic demand aided by healthy inflows of export earnings and wage earners' remittances, our international reserves is also growing everyday standing presently at a record high of more than USD 16 billion. Our current account balance has been consistently positive for most of the year. Right now it is the only with balance of account jumping. All these achievements have been mainly possible because of noteworthy contributions of our hardworking, innovative and skillful exporters.

Exports of manufactures have been on vigorous growth trend, even in the face of stiff competition and MFA phase out. Our exporters have established solid credential for Bangladesh in global trade as a leading player in apparels and textiles exports, despite not being endowed with advantage of local sourcing of primary inputs. The timely innovation of back to back import letters of credit against export orders helped crucially in spawning our apparels export sector from scratch, amidst acute scarcity in foreign exchange prevailing in its early years. The competitive efficiency of our apparels exports have outlasted the MFA and continued flourishing in the post MFA quota free WTO regime. Our apparels export sector has earned the same renown for driving down global prices of apparels as China earned for other manufactured goods. Our exporters are also appropriately responding to recent heightened concerns of foreign buyers about eco-friendly sustainable production practices and decent work environment with fair wages for labor.


Contribution of apparels export industry on women employment and women empowerment leading to accelerated rate of achievement of MDGs is also noteworthy. The social remittance of ideas through the women workers to the rural areas deserve to be well appreciated as well.

Therefore, we need to maintain peace and stability in the RMG sector for our collective good. Both owners and workers must work hard to come out of the tension which we are seeing around the wage issue. Recent unpleasant events like fire in Tazreen Fashon, Rana Plaza collapse and suspension of GSP facilities put our exporters into more challenging and competitive situation in the international market. After these events, several market analysts foresaw that our RMG exports may suffer from growth. But recent data indicate that RMG export growth still upbeat. However, we are aware of post Rana Plaza effects of RMG. To overcome such unpleasant situation, BB has established "Bangladesh Bank Disaster Relief and Social Responsibility Fund". Moreover, an MOU has been signed between BB and JICA for one billion Yen for rehabilitation RMG industries. Side by side, Bangladesh Bank is playing its due role by remaining constantly vigilant about the day to day movement in Taka-dollar exchange rates. Despite the floating regime, BB is continuously intervening in the foreign exchange market through purchase of sizeable amount of USD to keep Taka exchange rate competitive for our exporters.

We are seeing dynamic enthusiasm and growth thrusts in other non-textile non-apparel export sectors as well, with exporters making successful inroads with newer goods and services into newer markets. Our young educated crop of tech savvy youth have earned recognition from global buyers of IT enabled services, freelancing successfully amidst limitations in connectivity and other facilities. Our shipbuilders and light engineering goods manufacturers are already in the global export market. Growing horticultural exports have brought in higher quality and yield in local production, aided by adoption of improved production practices. Efficiency gains in the export sector have spilled over also in output practices in manufacturing and services catering to local demand. Our exporters resiliently maintained positive export growth even at the height of the global financial crisis. In coping with the current demand weakness in traditional Western markets the exporters are being supported by existing Government subsidies, and pre-shipment export credit at lower interest rate. I am confident that aided by these support measures, our exporters will show the same resilience and ingenuity in overcoming any unpleasant development.

Award events like this acclaiming excellence in export performance are important confidence boosters iaiming at newer heights of performance. My heartiest congratulations for the exporters to be awarded today, they will be the examples and guiding lights for others to emulate. Sponsoring of the award event on a continuing basis by HSBC, a globally active international bank signals its abiding support commitment to global growth aspirations of our exporters; and I thank and congratulate the HSBC regional and local heads for continuing this initiative which I believe must encourage and help our exporters adopt international best practice standards in corporate governance and financial disclosures, guiding them towards securing credit ratings high enough to enable accessing debt and equity capital on favorable terms from international markets.


ACH (Automated Clearing House), 38

Alternative Banking, 43

AML Software, 86

Authorized Dealer, 152

Bailouts, 496

Balance of Payment, 32, 348

Bangladesh Automated Clearing House, 113, 335

Bangladesh Electric Fund Transfer Network, 320, 328

Bank Supervision, 480

Banking Excellence, 73, 76

Banking Integrity, 75

Basel II Capital Adequacy Framework, 45

BCBS, 30, 63

BIMSTEC Countries, 86

Bottom up Approach, 12

Branchless Banking, 307

BRICS, 21

Budget Deficit, 15, 172

Budget Deficit Financing, 15

Business Process Outsourcing, 334

CAMELS, 152, 251, 270

Capacity Building, 12, 277

Capital Assessment

Carbon Credit Market, 262

Carbon Tax, 534

Carbon Trading, 628

Central Banking Orthodoxy, 8

CIB, 130, 137

Civil Society, 18, 44, 118, 148, 167

Classified Loans, 78, 85

Climate Change, 12, 24, 167

Climate Risk Fund, 269

Collateral Free Finance, 561

Contagion, 479, 486, 492, 500

Contagion Effect, 21, 55

Conventional Banking, 60, 212, 305

Conventional Banks, 518, 610

Convertible Currency, 5, 154

Co-ordination Council, 29

Core Banking, 326

Corporate Governance, 30, 38, 42

Cost-Saving, 61

CPI Inflation, 3, 22, 29

Credit Discipline, 69

Credit Information, 39, 106

Credit Rating, 5, 21, 365

Credit Report, 306, 374

Credit Resources, 56

Crisis Regulatory, 59

Crop Insurance, 113, 204, 208

CTO Forum, 330

Data Warehousing, 292

Debt Crisis, 66, 74, 138

Debt Sustainability, 5

Dedicated Credit Line, 561, 563

Department of International Development, 113, 310

Dependency Ratio, 524, 641

Deposit Insurance, 182,

Depression, 485, 500

Derivatives, 439, 518

Diaspora Bond, 403

DIBOR, 375

Direct Investment, 74, 357

Disaster Management, 167, 296

Domestic Demand Driven Growth, 516


Food Security, 466, 488, 578

Foreign Exchange Reserve, 345, 356

Fraudulent Lending, 78

Gender-Sensitive Finance, 37

GINI Index, 272

Global Crisis, 3, 158, 182, 354

Global Imbalances, 8, 59, 354

Global Monetary Order, 354, 358

Global Slowdown, 28, 154

Global Supervisory Forums, 28, 56

Global Warming, 260

Good Domestic Harvest, 370, 473, 509

Government Bailouts, 45

Green Banking, 160, 167, 247

Green Banking Policy, 25, 60, 258

Green Climate Fund, 267, 273, 275

Green Growth, 297, 300

Green House Gas, 261

Growth Driver, 532

Growth Momentum, 2

Hedge Funds, 23, 358

Hybrid Hoffman Kiln, 273, 277, 279

Illiquidity, 496

Inclusive Approach, 23

Inclusive Budget, 16

Inclusive Economic Growth, 38, 60, 355

Inclusive Growth, 24

Inclusive Social Development, 534

Information and Communication Technology, 301

Infrastructure Financing, 397

Inland Bill Purchase, 83

E-commerce, 318, 326

Economic Downturn, 20, 62, 354

Economic Regulation, 59

Economic Slowdown, 19, 154

Economic Slump, 25

Effluent Treatment Plant, 103, 113, 249

E-governance, 115, 302

Electronic Dash Board, 83

Electronic Fund Transfer, 492, 502, 510

Energy Efficient, 251, 260, 271

Enterprise Data Warehouse, 307, 316

Enterprise Risk Management, 40

Entrepreneurship, 24, 38, 119

Environmental Risk Management (ERM), 255, 257, 260

E-payment, 105, 309, 315

E-payment Gateway, 106, 319

Equity and Entrepreneurship Fund, 170, 314

E-tendering, 258, 315

External Fraud, 75, 84

Extreme Poverty, 410, 466, 488

FATF, 87, 90, 379

Financial Crisis, 3, 85, 138, 147, 157,

Financial Inclusion, 8, 10, 21, 31

Financial Instability, 25, 80

Financial Integrity, 81, 160

Financial Sector Bubbles, 23

Financial Stability, 7, 8, 25, 26, 27

Financial Superpower, 37

Financial Turmoil, 53, 348, 354

Fiscal Bailouts, 25, 27

Fiscal Restraint, 26

Fiscal Stimulus, 492


Monetary Policy, 301, 347

Monetary Union, 5, 6, 358

National Payment Switch, 326, 334

Non-Financial Corporates, 51

Non-Tariff Barriers, 363

Off-site Supervision, 84

On-site Supervision, 75, 81

Over-regulation, 58

Overvaluation of Owners' Equity, 49

Paper-based Payment, 321

Paperless Banking, 260

Perspective Plan, 9, 12, 19

Portfolio Investment, 20, 353

Principal-Agent Relationship, 7

Progressive Taxation, 11

Pro-Poor Growth, 347, 360

Public Private Partnership, 39, 249, 345

Quantitative Easing, 23

Real Economy, 60, 71, 155

Recurrence, 31

Recurrent and Development Budget, 14

Recurrent and Development Expenditure, 13

Regional Cooperation, 446, 482, 505

Regulated Financial Service Providers, 310

Regulatory Capital, 45

Renewable Energy, 3, 24, 61

Resilience of Financial Institutions, 7

Resilience of the Financial System, 80

Revenue Expenditure, 18

Insider Trading, 53

Insolvency, 60

Interest Rate Risk, 69, 75

International Standards Organization, 267

Investment Banking, 28, 63

Investment Momentum, 474

Investment Promotion and Financing Facility, 378, 576

Islamic Banking, 60, 212, 610

Knock on Effects, 29

Kyoto Protocol, 268

LIBOR 261, 287

Linkage Finance Programme, 562

Liquidity Glut, 3

Liquidity Risk, 48, 66

Loan against Trust Receipt, 76

Loan Syndication, 48

Macroeconomic Imbalances, 31

Macro-Environment, 27

Macro-Prudential, 7, 27, 81

Magnetic Ink Character Recognition, 303

Manifest Injustice, 42

Mark- to-market Valuations, 59

Market Capitalism, 25

Market Discipline, 38, 42, 51

MDGs 139, 140

Medium Term Budgetary Framework, 16

Micro-Environment, 27

Middle Income Trap, 24

Monetary Aggregate, 395

Monetary Growth, 369, 532, 557

Monetary Imbalances, 25


Sustainable Growth, 275

Sustainable Sovereign Debt, 25

Systemic Collapse, 37

Systemic Risk, 95, 195

Systemic Stability, 61, 195

Terrorism Financing, 56, 86, 116, 373, 563

Toxic Assets, 370, 477, 500

Trade Finance, 475, 491, 492

Trade Settlement, 475, 533, 615

Vicious Circle, 27

Vision 2021, 15, 631

Volcker Rules, 28

Whistleblowers, 54

Rio+20 Summit, 274

Risk-based Approach, 40

Risk-mitigating, 61

SAARCFINANCE Forum, 29

Safety-net, 3, 360

School Banking, 160

Sharecroppers' Account, 22

Simulation Exercise, 64

Sixth Five Year Plan, 16, 164, 578

SME, 22, 140

Social Accounting Matrix, 638

Social Infrastructure, 38, 168

Social Safety Net Expenditure, 21, 357

Social Safety Nets, 556

Socially Responsible Financing, 548

Soft Law, Bangladesh Association of Banks, 270

Sovereign Rating, 378

Sovereign Debt, 25, 26

Speculative Excesses, 25

Speculative Investments, 60, 158

Stabilization of Market Interest Rate, 78

Strategic Plan 2010-14, 377

Stress Testing, 28, 30, 55

STRs and CTRs, 86

Structural Reforms, 74

Sub prime Mortgage, 36, 66

Sub-Prime Lending, 476

Sullying Shadows, 78

Supervisory Oversight, 42, 157

Supervisory Review, 38

Supervisory Structures, 56

Supply Chain, 505, 506, 539

Sustainable Development, 303, 309

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