Home Sustainability and Eco Friendly initiative news Bangladesh banks on green loans to help fight climate change

Bangladesh banks on green loans to help fight climate change

Bangladesh banks on green loans to help fight climate change

Green finance is growing fast in Bangladesh, official data shows, with the central bank and private banks boosting efforts to encourage companies from brick-makers to textile mills to invest in technology and solutions that tackle climate change.

Considered one of the most climate-vulnerable countries – due to impacts like worsening flooding, river and coastal erosion and storms – Bangladesh has been exploring a range of financial innovations, from green loans to climate-related insurance and microfinance.

Former central bank governor Atiur Rahman, who helped to develop the nation’s sustainable and green finance policies more than a decade ago, said the ripple effect of “pioneering green banking in Bangladesh has been phenomenal” – at home and abroad.

China’s and Indonesia’s central banks have followed the example of Bangladesh on sustainable finance, while Thailand and Uganda have recently sought its advice on the issue, he said.

“Other central banks are now transforming into more inclusive developmental regulators with forward-looking policies to encourage banks over green initiatives so the private sector feels reassured to go for sustainable investment,” Rahman added.

Yet some analysts say progress in Bangladesh is hindered by limited capacity at the central bank and private banks, and are calling for greater development of green financial instruments – such as green bonds – in order to help the market go mainstream.

“Commercial banks sometimes misuse funds in the name of green finance due to their lack of knowledge on technical aspects of green projects,” said Monzur Hossain, research director at the Bangladesh Institute of Development Studies.

Policy change spurs loans uptake

Bangladesh Bank launched its green and sustainable finance policy in 2012 – providing loans with interest rates between 2-4 per cent lower than standard lending, and longer repayment terms.

However, the push was not initially popular – due to a lack of awareness – and the central bank changed its policy in 2020 in a bid to boost uptake, according to Chowdhury Liakat Ali, director of Bangladesh Bank’s sustainable finance department.

The central bank has made it mandatory for financial institutions to disburse at least 15 per cent of their loan budgets to sustainable projects, and 5 per cent or more to green initiatives.

Sustainable finance, according to Bangladesh Bank, covers investments geared towards environmental, social, and governance (ESG) targets and the UN Sustainable Development Goals (SDGs), while green finance is focused solely on the environment

At least US$12 billion of sustainable finance and more than US$1.1 billion in green finance was invested by banks and financial institutions last year – increases of 58 per cent and 69 per cent respectively from 2021 – data from Bangladesh Bank shows.

There are now more than 117 such financing products on offer in Bangladesh – up from 68 last year – including for solar home systems and solar parks, biogas and wind power plants, waste management and recycling, and organic farming, for example.

Bangladesh Bank has also started giving awards for the best performers on sustainable finance – and every bank now has a dedicated green or sustainable department, according to Ali.

“We are now thinking about a sustainable climate change policy,” he said, explaining that it would factor in climate adaption and mitigation efforts, as well as loss and damage.

“We believe Bangladesh could be a pioneer at green and sustainable finance,” Ali added. “One day we might stop financing projects which are harmful for the environment.”

In addition to banks, insurance brokers and microfinance institutions are also playing a role – offering small loans and insurance for agriculture, for example – while the SAJIDA Foundation last year issued the nation’s first green bond.

The nonprofit raised 1.1 billion taka (US$10.3 million) from private-sector organisations, using it to provide micro-loans to farmers and poor families in the 36 districts where it works.

Garment manufacturers take advantage of green finance

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, a private bank, said green and sustainable borrowers were “very conscious” and tended to repay their instalments on time.

“As bankers, we feel proud when we see our loans used for environment-friendly and sustainable projects,” Rahman said.

“Bangladesh is ranked seventh in terms of climate risk,” he said, referring to the Global Climate Risk Index, an annual ranking produced by researchers at Germanwatch.”That’s why we need to work on climate-smart investments.”

Garment manufacturers have led the way among the Bangladeshi companies taking advantage of green and sustainable loans.

More than 185 garment factories have received LEED certification, an international standard for green buildings – which is the highest number among the world’s garment-exporting countries – said the BGMEA, Bangladesh’s trade organisation for the sector.

One such company, Envoy Textile, in 2021 took a loan of US$1.84 million from a non-banking financial institution at an interest rate of 5.5 per cent to replace its traditional machinery with eco-friendly technology.

Automatic cutting and sewing machines, inverter air conditioners and LED light bulbs have helped Envoy Textile reduce its carbon emissions, said managing director Abdus Salam Murshedy.

“Another big achievement is that the buyers are taking more products as we are using environment-friendly equipment,” he said. “They are signing long-term contracts with us.”

This story was published with permission from Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers humanitarian news, climate change, resilience, women’s rights, trafficking and property rights. Visit https://www.context.news/.


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