Confidence building on financial institutions as humane and socially responsible entities

prevent buildup of demand pressures from
non-farm enterprises, writes Atiur Rahman Inflation targets and policy options for sustaining growth and equitable development constitute a theme of topical importance for all economies in today's world, large and small, developed and developing. In the closing decades of the last century the view that monetary authorities should pursue inflation targets as their sole objectives gained prevalence, interalia in the multilateral institutions like the International Monetary Fund (IMF) and World Bank (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 destabilising 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 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 underserved 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 inter bank 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 small and medium enterprise (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 sensitised 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 favouring lending for productive pursuits and discouraging lending for wasteful, unproductive and speculative activities. This is an edited version of the presentation made by Dr. Atiur Rahman, Governor of Bangladesh Bank, at the inaugural function of the UNDESA-BB regional training workshop options and instruments for sustaining growth and equaitable development', last Sunday in Dhaka