Past, Present & Future of Green Banking in Bangladesh

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Past, Present& Future ofGreen Banking

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RATAN GHOSH

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Green Banking

Green Banking is an environment friendly solution to save energy, to reducecarbon emission, to transform waste and other natural resources into energyand save environment from pollution.

Green Banking means promoting environment friendly practices andreducing your carbon footprint from your banking activities. (Bahl 2012a : 27)

Green Banking‘ refers to the banking business conducted in such areas and insuch a manner that helps the overall reduction of external carbon emission andinternal carbon footprint. (Meena 2013: 1182)

Green Banking is the term used by banks to make them much moreresponsible to the environment. The term green banking means developinginclusive banking strategies which will ensure sustainable economicdevelopment. (Ahmed, Zayed and Harun 2013 : 241)

February 4, 2016 Past, Present & Future of Green Banking3

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Evolution of Green BankingThe concept of green banking was developed in the western countries. Green

Banking formally started in 2003 with a view to shielding the environment.

Then the Equator Principles (EPs) were launched and were initially approvedby some leading global banks, such as Citigroup Inc, The Royal Bank ofScotland, Westpac Banking Corporation.

In March 2009, Congressman Chris Van Hollen of USA introduced a GreenBank Act with the aim of forming a green bank under the ownership of the USgovernment.

'First Green bank' is the first bank of its kind to promote positive environmentaland social responsibility with its base in Eustis and Clermont Florida USA.

After introducing the concept of Green Banking, the initial decision was tominimize the use of paper in banking works in order to reduce the need to cuttrees for availing raw materials for paper production thus minimizingdeforestation.


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Evolution of Green Banking There are two ways of green banking practices : -

1) The first of which is in-house green banking;

Creating clean and hygienic banking environment, green building, reforestation, onlinebanking, waste management, installation of solar panel on the rooftop of the bank areinvolved in the in house Green Banking.

2) And the other is the form that is practiced by the bankers in their business area;

Financing the green projects like Biogas Plant, Solar/Renewable Energy Plant, Bio-fertilizer, Plant, Effluent Treatment Plant (ETP) and voluntary activities of banks aremajor practices by the bankers in their business areas.

Bangladesh Bank has taken initiatives for practicing green banking here, sinceBangladesh is vulnerable to risks of submerging its lower parts as well as southern partsnear to sea beach in case of climate change,

Bangladesh Bank issued a circular in February 27, 2011 on Policy Guidelines for GreenBanking. However, the green banking policy has been implementing since 2012 only.

Since then the significance of green banking has been on the rise in the financialsector, particularly in the banking sector.


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Evolution of Green Banking…………..(Con…d)


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Transformation from Conventional Banking to Sustainable Banking

Conventional Banking Green Banking

Only Profit People, Planet & Profit

Economic Benefit Social Benefit

Operational Efficiency Allocation Efficiency

Institutional Profit Community Profit

Organizational Commitment Ethical, Human and Social Commitment

Financial Stability Financial and Social Stability

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Background of The Study

For the purpose of this presentation, we have tried to investigate the green

banking practices of the listed commercial banks (including Islamic and

conventional).

In theory banks are not identified as environment polluting institutions

however, they finance other polluting industries like textile, tannery, food etc.

Bangladesh Bank as the governing body has imposed stringent green banking

regulations in order to ensure a sustainable future for the economy resulting in

banks being identified as highly regulated institutions.


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Motivation of the Study

To investigate the extent of green banking practices in the listed banks.

To show the determinants of green banking disclosures.

To show the trend of green banking adaptation in Bangladesh.

To find out the gap between the imposed rules (by Bangladesh Bank) and

green banking practices.

To present a probable accounting treatment of green banking practices.

To find the long-term effect of green banking practices.


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Prior Research

Very few studies have been conducted on the issues of green banking in

Bangladesh. Of late, there are growing numbers of studies based on green

banking (see for example, Biswas, 2011; Bahl, 2012; Rahman et. al, 2013;

Ahmad et.al, 2013; Islam et. al, 2014; Haque et.al, 2015). It indicates that the

issues of green banking are drawing attention of the researchers. In the context

of Bangladesh, green banking bears significant importance, since Bangladesh is

a highly vulnerable country to the environment and climate change.


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Prior Research………………….(Cont….d)

Recognizing Banking sectors accountability, it has been argued that

environmental impact of bank’s external activity is huge though difficult to

estimate. Thus, encouraging environmentally responsible investments and

careful lending should be one of the responsibilities of the banking sector

(Sahoo and Nayak 2008). The bank should go green and play a pro-active role

to take environmental and ecological aspects as part of their lending

principle, which would force industries to go for mandated investment for

environmental management, use of appropriate technologies and management

systems (Hayder 2012).


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Prior Research………………….(Cont….d)Steiner (2015) noticed a sequential economic growth in the Asia Pacific

region which has social and environmental costs. Different countries’ green

approaches contribute to the sustainable development in this region. In 2014

the clean energy investment stood in 36 percent in the developing countries.

But, public finance is not adequate for the green transition alone; the

financial markets can work as a keystone for the development of green economy.

On a comparative study Ullah (2013) argued that financial sector of

Bangladesh is playing a key role as one of the important stake-holder of the

economy enforcing the businessmen/ industrialists of the country to design

their various strategy/action plans keeping the crucial environmental issues.


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Paul and Russel (2015) suggested that as a low lying

country, Bangladesh is the worst sufferer among the lands of South Asia.

Financial sector is the only driving force to recovering from loss

occurred day by day in various industries from the perspective of

economic and environmental controversy. This sector finances a lot to

industrial development. The root of all is nothing but banking. So, it is

time to go green for which it is exigent to figure out and innovate the

models, based on which the financial sector runs.


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Ahmed et. al, (2013) found that six factors namely economic

factor, policy guideline, loan demand, stakeholder

pressure, environmental interest, and legal factor are the major

influencers of green banking practices in Bangladesh. From a factor

analysis, it has been revealed that these six factors have combined

variance of 65.25% of the decision regarding the adoption of green

banking by the commercial banks to ensure sustainable economic

development.


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Prior Research………………….(Cont….d)In a recent study, Hossain et.al (2016) through content analysis of the annual reports of ten

sample banks, they found that Bangladeshi banks are reporting on green banking

issues, since Bangladesh Bank (the central bank of Bangladesh) have introduced green

banking program in 2011. They claimed that the level of disclosure has increased over the

years up to 2013 and the banks mostly provided ‘good news’ in their annual reports.

Bangladesh Bank Governor argued that all need to change mindset about

environmental issues for making a better future through greening financial

transactions (Daily Star, 2010). To save our planet it is the time to take initiative for

green banking. The banks should give priorities in providing loan to the sectors that

encourage environmental practices (Rashid 2010).


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Prior Research………………….(Cont….d)From the above analysis, it is now clear that there are several studies concentrating on

the green banking practices of Bangladeshi Banks. It is noteworthy to say, Bangladesh

Bank has issued a policy guidelines for commercial banks to introduce green banking in

2011. As per this guideline, banks need to fulfill it under three phases where the

deadline for the final phase was up to December 31, 2013. To the best of our

knowledge, there is no study that examined the extent of disclosures on green banking

issues after the culmination of Bangladesh Bank’s guideline. Thus, this study is an effort

to fulfill the existing gap in the literature by investigating the extent of green banking

compliance of listed banks after the termination of compliance deadlines.


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Phases of Green Banking Policy:


December 31, 2011

December 31, 2012

December 31, 2013

Phase I

Phase II

Phase III

Green Banking Rules

(BRPD Circular 02)

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Phases of Green Banking Policy:


Initiating In-house Environment Management

Introducing Green Marketing

Disclosure & Reporting

Incorporation of Environmental

Risk in CRM

Creation of Climate Risk

Fund

Creating Social Awareness

Policy formulation and governance

Introducing Green Finance

Online Banking

Phase I

1 32

4 5 6

7 8 9

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Phases of Green Banking Policy…....(Con..d)


Disclosure and Reporting

Green Strategic Planning

Setting Up Green Branches

Improved In-house Environment Management

Bank Specific ERM Guideline

Rigorous Programs to Educate Clients

Sector Specific Policies

Phase II

1

3

2

45

7

6

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Phases of Green Banking Policy…....(Con..d)

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Reporting in Standard Format with External Verification

Designing and Introducing Innovative Products

Phase III

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MethodologySample selection:

Sample consists of 30 listed banks with Dhaka Stock Exchange (DSE) in each year.

Analyzed annual reports of these banks related to the years 2013 and 2014 respectively.

Content analysis framework:

Content analysis procedure been used track the extent of disclosure on green banking practices.

Content analysis is a research technique which has specialized proceedings. It is a scientific tool

that helps in making inferences from texts and gives practical knowledge and insights about the

context (Krippendroff, 1980). In other word, it deals with the codification of both qualitative and

quantitative information into pre-determined categories so as to types of the presentation and

reporting of information can be traced (Guthrie and Abeysekera, 2006:120).


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Methodology……………….(Con…..d)

Disclosure Index:

To track the green banking practice related disclosures, a disclosure

index has been formulated. The disclosure index is formulated primarily

from the Bangladesh Bank’s green banking policy guidelines issued in

2011. As per the circular of Bangladesh Bank, commercial banks are

required to implement green banking under three phases. Three phases

include total of 18 items. We have formulated a disclosure index

customizing these items into 13 items.


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Researchers such as Prado-Lorenzo, 2009; Belal et.al. (2010), Hossain et.al, 2016 used

un-weighted disclosure. Another approach is weighting of the items, as performed in

some studies (Pirchegger and Wagenhofer, 1999). In our study, we have used weighted

index, even though there is some arbitrariness inherent to the use of any weighted index

(Giner, 1997). Moreover, studies that use both weighted and unweighted indices draw

similar conclusions from both type of indices (Choi, 1973; Chow and Wong-boren, 1987).

For data codification, we have used weighted disclosure index where

‘0’ is assigned for no disclosure,

1 is assigned for general disclosures and

2 is assigned for substantive disclosures.


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(IFIC, 2014)……………….Content Disclosure of 2.

“More emphasis has been given on the bank’s operational policy, as reflected in the allocation of its budget for promoting green finance, environmental risk rating, and online banking, ATM, internet and Mobile/SMS banking "(ICB Islamic Bank Limited, 2013)…………….Content Disclosure of 1.


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Research Methodology……………….(Con…..d)

The rationale behind using weighted disclosure index is to penalize those

items which are not disclosed comprehensively. Since, the disclosure items are

derived from the Bangladesh Bank’s guidelines, it is expected that all the banks

comply with this guideline.

To properly portray the real implementation of this policy, we have awarded

those items which are disclosed comprehensively. Moreover, while coding the

data, we have adopted very careful measures to make sure the acceptability of

result. At first, we have analyzed 10 banks annual reports and then we have

analyzed the differences of our coding. Deviations were sorted out after discussing with

the authors.


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Research Methodology……………….(Con…..d)1. Establishment of Green Banking Unit

2. Establishment of Green Banking Policy

3. Climate Change Responsibility

4. Climate Change Fund

5. Green Finance

6. Energy Efficiency

7. Water Consumption

8. Online Banking

9. General Statement on Climate Change & Global Warming

10. Green Banking Products

11. Social Awareness Creation

12. Sector Specific Green Banking Policy

13. Incorporation of Environmental Risk in CRM


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Data Index (2013)


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Disclosure Index Analysis (2013)


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Disclosure Index

Disclosure Index

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Data Index (2014)


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Disclosure Index Analysis (2014)


00.10.20.30.40.50.60.70.80.9

1

AB

BA

NK

CIT

YB

AN

K

IFIC

ISL

AM

IBA

NK

NB

L

PU

BA

LIB

AN

K

RU

PAL

IBA

NK

UC

BL

UT

TA

RA

BA

NK

ICIB

AN

K

EB

L

AL

-AR

AFA

BA

NK

PR

IME

BA

NK

SO

UT

HE

AS

TB

DH

AK

AB

AN

K

NC

CB

AN

K

SIB

L

DU

TC

HB

AN

GL

A

MT

BL

ST

AN

BA

NK

L

ON

EB

AN

KL

BA

NK

AS

IA

ME

RC

AN

BA

NK

EX

IMB

AN

K

JAM

UN

AB

AN

K

BR

AC

BA

NK

SH

AH

JAB

AN

K

PR

EM

IER

BA

NK

TR

US

TB

AN

K

FIR

ST

SB

AN

K

Disclosure Index

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Element Index (2013)


0

10

20

30

40

50

60

Series1

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Element Index (2014)


0

10

20

30

40

50

60

Series1

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Implementation of Green Banking in Bangladesh

By Service Provided

By In-House Practices By Financing

Online Banking Using Solar Panel in Branches By Direct Financing

Internet Banking Using Solar Panel in ATM Booths By Indirect Financing

SMS & Mobile Banking Using Electronic System Instead of Papers


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Online Banking in Bangladesh


Bank type Year 2012 Year 2013 Year 2014

SCBs 177 839 1887

SDBs 77 113 81

PCBs 3116 3469 3655

FCBs 75 73 476

NSBs 0 63 173

Source: Bangladesh Bank

0

500

1000

1500

2000

2500

3000

3500

4000

SCB SDB PCB FCB NSB

Year 2012

Year 2013

Year 2014

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Internet Banking In Bangladesh



SCBs 21 21 27

SDBs 0 0 0

PCBs 666916 932763 1296300

FCBs 149541 164974 188470

NSBs 0 0 1035


0

200000

400000

600000

800000

1000000

1200000

1400000

SCB SDB PCB FCB NSB

Year 2012

Year 2013

Year 2014

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SMS/Mobile Banking In Bangladesh


0

50

100

150

200

250

300

350

SCB SDB PCB FCB NSB

Year 2012

Year 2013

Year 2014


SCBs 1,353 3,270 3,231

SDBs 0 0 9,324

PCBs 1,971,106 4,441,270 9,242,790

FCBs 165,978 156,101 234,739

NSBs 0 4,348 46,586


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Branches Powered By Solar Energy


0

50

100

150

200

250

300

350

SCB SDB PCB FCB NSB

Year 2012

Year 2013

Year 2014


SCBs 21 16 38

SDBs 22 37 23

PCBs 169 255 323

FCBs 3 3 4

NSBs 0 1 25


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Direct Green Financing of Banks



SCBs 3,513 445 1,039

SDBs 1,803 13 47

PCBs 5,624 6,909 5,456

FCBs 881 32 1,217

NSBs 0 0 224.6


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

SCBs SDBs PCBs FCBs NSBs

Year 2012

Year 2013

Year 2014

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Indirect Green Financing of Banks


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

SCB SDB PCB FCB NSB

Year 2012

Year 2013

Year 2014


SCBs 2,994 806 630

SDBs 6,402 1,382 100

PCBs 173,187 79,062 91,150

FCBs 76,517 17,323 18,459

NSBs 0 0 20,689


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Customized Elements Ranking1. Climate Change Responsibility

2. Climate Risk Fund

3. Incorporation of Environmental Risk in CRM

4. Energy Efficiency

5. Green Finance

6. Social Awareness Creation

7. Sector Specific Green Banking Policy

8. Water Consumption

9. Green Banking Products

10. Online Banking

11. Establishment of Green Banking Policy

12. Establishment of Green Banking Unit

13. General Statement on Climate Change & Global Warming


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Element Wise Result Analysis

Reason Behind implying Green Banking Rules:

Institutional Theory

Stakeholder Theory

Resource Dependency Theory

Strategic Response Theory


0

20

40

60

0

20

40

60

2013

2014

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Element Wise Result Analysis………….(Con……d)

Reason Behind incomplete & improper practice of Green Banking:

Lack of Effective Monitoring of Bangladesh Bank

Top Management’s intention

Family Ownership

Political Influence

Long Temporal Spread

Absence of Proper Incentives System

Differences in Commitment

Less Qualified HR


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Comparison Scenario


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

2013 2014 Column1

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Average Growth in Green Banking Disclosure


0.49

0.495

0.5

0.505

0.51

0.515

0.52

0.525

0.53

2013 2014

Bank

Bank

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Probable Accounting Reporting of Green Banking

The Environmental Cost Categories by UN are :

Waste & Emission Treatment

Prevention & Environmental Management

Waste & Emission Control Cost

Prevention & other Environmental Management Cost

Research & Development Cost

Less Tangible Cost


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The four Probable allocation keys are: (Schaltegger and Muller 1998)

• volume of emissions or waste

• toxicity of emission and waste treated

• environmental impact added (volume x input per unit of volume) volume of the emissions treated and

• the relative costs of treating different kinds of emissions.

Additional:

Reduction of Fresh Water Consumption

Reduction of Paper Consumption

Huge amount of Green Marketing Cost


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Example:

From Annual Report of Mutual Trust Bank, 2014

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From Annual Report of Standard Bank, 2014

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In this Example of MTB & SBL, we found that MTB is disclosing more about

its green banking activities specifically water consumption which is subject to

some additional cost whereas SBL is giving a statement about this.

Proposed Incentive System:

Water Harvesting Cost of MTB is 6,00,000 taka. If the Regulators give an

opportunity to MTB to capitalize this amount and deferred the cost for the

following two years, MTB will be motivated to invest more in green banking

activities. Whereas SBL or other Banks (with least GB activities) will come

forward to invest more in environment friendly projects.


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Recommendations


Sustainable growth

Creating Awareness

Imparting Education

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Recommendations……………………………(Con…..d)


Creating awareness

Internal Subsystem

Target groups

-Managers

-Personnel

Means of creating

awareness

-E-learning

-Banks news letter

External Subsystems

Target groups

-Clients

-General Public

Means of creating

awareness

-Road Shows

-Media

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Recommendations………………………….(Con…..d)


Imparting Education

Internet E-learning programsParticipations conferences and

meetingsAnnual Environmental Report

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Future Guidelines for GB

• Meaningful Disclosure Approach

• Green Credit Policy as a floor, not ceiling

• International Guidelines for Green Banking

• Manufacturing Sectors can be included

• Mandatory Environmental Audit


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Past, Present & Future of Green Banking in Bangladesh