Developing inclusive financial system for sustainable development

Designing a sustainable financial system and following effective actions are essential for ensuring financial stability of developing countries like Bangladesh. A 'founding platform' built with relevant policy actions and responses of the financial sector market players is a crucial pre-condition for designing an effective sustainable financial system. Based on the long-term vision and national and sector-specific plans, policies and strategies, the National Sustainable Development Strategy 2013 was developed by the Bangladesh government that has provided a roadmap for materialisation of the national goal of attaining the sustainable development agenda. It has identified several sustainability concerns covering sustained economic growth, development of priority sectors, social security and protection of environment, natural resources and disaster management.
There is no doubt that in recent decades, Bangladesh has achieved commendable success in some economic and social indicators. For example, Bangladesh has made commendable progress in respect of eradication of poverty and hunger. Agriculture, the core sector of the economy, has improved in terms of productivity through using technology; and small and medium-sized enterprises (SMEs) of the country started producing better outcome in response to the remarkable policy supports. Its recent progresses on a number of indicators have surpassed those of its neighbouring developing countries in South Asia. Now the development challenge is to maintain the pace of and sustaining the achievements. In this way of advancements, alongside a large number of government and private agencies, financial sector market players have played a commendable role through their sustainable financial services. It is a sustainable financial system that can offer due support to the country to attain its sustainable development agenda.
A remarkable change has taken place in the financial sector of the country over the years in terms of coverage, activities, operations, performance, complexities and challenges.
Banking sector is the core component of the financial sector, and the sector performed poorly following independence, offering a narrow range and inefficient delivery of financial instruments, and being largely non-competitive in structure. Over the years, the country pursued a series of legal, policy, and institutional reforms to improve the process of financial intermediation to ensure more efficient allocation of financial resources and to improve the competitiveness of the private sector. In response to the changes, performance of the banking industry has improved by increasing their scope of activities, improving service quality, engaging technology, and introducing social connectivity through inclusive practices. After having a number of reform programmes related to credit and trade services operation of banks, current banking activities have reached a stage of maturity in view of several indicators. In recent years, availability of different tools like credit risk management and grading manuals, online credit information bureau, legal support, accessibility to tailored software and, most importantly, injection of a pool of talented bankers in the banking sector have upgraded the banking operation of commercial banks. The central bank has implemented Basel II capital regime and implanting Basel III requirements. It is exercising the oversight of corporate governance and internal control functions for establishing sound risk management processes and practices in banks. Branches of banks are coming under closer monitoring and customers' interests are getting more attention of the Bangladesh Bank (BB). In spite of some remarkable improvements, the banking sector is facing challenges mainly in areas of 'credit quality' and 'regulations of the government control banks'. Especially, a few banks are struggling with high non-performing loans. Despite improvements, corporate governance practices remain a critical challenge in the banking sector. Activities of Non-Bank Financial Institutions (NBFIs) expanded over the years; however, they are yet to play supplementary role of banks in providing financial services. Notable regulatory changes have taken place in microfinance and insurance sector of the country. In last two decades, the capital market witnessed a number of institutional and regulatory advancements which have resulted in diversified capital market intermediaries and have gone through two major rounds of boom and burst. Efforts are on to improve operations of the market.
It is recognised in Bangladesh's development strategy that achieving the goal of sustainable development would not be possible if financial services cannot be made available to all. In a resource-constrained developing country like Bangladesh, finance is a powerful intervention and access to finance especially to the poor is vital for promoting inclusive economic growth and eradicating poverty. An inclusive financial system provides a number of benefits to the economy by ensuring more resources for investment, creating employment opportunities, ensuring economic and financial stability, and reducing vulnerability. Despite substantial expansion of bank branches, NBFIs, microfinance institutions (MFIs) and other financial institutions, a significant share of the country's adult population still remains financially excluded. Though a large section of the population remains excluded in urban areas, the rural areas contain most of the financially excluded population.
It is established that financial development and financial services can play a big role in attaining the national and UN development goals. Addressing the challenges of poverty, illiteracy, inadequate health services, gender inequality, and environmental degradation is highly related to addressing financing needs. Especially financing to small enterprises, women and underprivileged, corporate social responsibility and green banking activities can clearly be linked to the attainment of the sustainable development targets of Bangladesh. Credit facilities to small and micro enterprises, agriculture and underprivileged people enable the poor to generate employment and earnings that in turn have an impact on poverty. Again, supporting women by offering financial services is expected to contribute to their employment and income that in turn ensure gender equity, education and health. In Bangladesh, workers' remittances, mainly sent through banks, have also notable impact on rural consumption and investment that are directly related to poverty, education and health.
A sustainable financial sector cannot be ensured without addressing agriculture and rural sector adequately. Agriculture is the major source of livelihood of rural people of the country and is directly related to their employment and income. Credit flow to the agricultural sector is crucial for raising GDP, generating employment and alleviating poverty. These, in turn, influence education and health of the rural people. Till date, formal financial institutions have contributed insignificantly in financing the farm sector of Bangladesh. Development of micro and small enterprises is envisaged as a key element in the development strategy. Enhanced micro, small and medium enterprise activities in rural and backward regions constitute a key component of the strategy for rural development and reduction of poverty and regional disparity. Among the many compelling reasons why small and micro enterprises fail to realise their full potential, inadequate access to finance is prominent and most commonly cited. Environment and energy are two critical interrelated issues of sustainability concerns, and are connected with the country's poverty and growth. Poverty, growth and environmental sustainability are intimately bound together in Bangladesh. Common people live in an over-exploited and degrading natural resource base. Industrial and urban growths are contributing to economic livelihoods but already are serious threats to environmental and human health because of inadequate attention to environment and sustainable development. The financial sector holds a unique position in an economic system that can affect production, business, and other economic activities through their financing activities, and thus also influence environmental and energy sustainability. There is no doubt that a lot has to be achieved to attain the targeted level of environmental and energy sustainability of the country.
Dr. Shah Md Ahsan Habib is Professor and Director (Training), Bangladesh Institute of Bank Management (BIBM).
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