Strengthening financial stability, achieving inclusive growth

Mainstream monetary policy approaches of developed economies seek to impact real sector economic activities primarily by influencing financing costs and occasionally also by influencing liquidity volumes, leaving sectoral flows of financing to be decided by markets according to prevailing risk-return trade-off preferences. Recurring cycles of financial instability and attendant spells of financial exclusion show this mainstream monetary policy approach to be sub-optimal for both growth sustainability and stability.  In macroeconomic policy laxity-driven liquidity surfeits like in the run up to the last global financial crisis, profit-focused markets tend to siphon off financing away from lower return SME (small and medium enterprises) and green initiatives, hurting sustainable growth, towards speculative price bubble creation in commodity and asset markets, impairing stability. Also, entrenched interests in traditional polluting output practices always try to resist re-channelling of financing flows into adoption of new green alternatives.
Bangladesh Bank (BB), the central bank of a low-income developing economy, has opted to deviate from the mainstream monetary policy approach of developed economies, deliberately imparting some directional bias in monetary and financial policies towards supporting inclusive, sustainable growth. The growth supportiveness mandate in BB's charter lends legitimacy to this approach, backed by the government's inclusive and sustainable growth strategy, underpinned further by a broad social consensus for equitable, sustainable development.
BB's inclusive, growth sustainability supportive monetary policy approach is serving Bangladesh economy well in upholding growth and stability, as evidenced in decades of steady growth performance and macro financial stability amid domestic shocks and external turbulences, including the last global financial crisis and the subsequent global growth slowdown. Six-plus per cent real annual GDP (Gross Domestic Product) growth trend is continuing for well over a decade now, CPI (Consumer Price Index) inflation remaining in single digits, and fiscal deficit under four per cent of GDP.
Double-digit export growth and workers' remittance inflows have kept BoP (balance of payments) current account in healthy surplus with rising foreign exchange reserves already adequate for six months' imports and exceeding twenty per cent as cover of broad money base. The trade gap is also declining at a rapid pace. Steadily rising GNI (Gross National Income) per capita has crossed (lower) middle income country group threshold by June 2013, and quite a few MDGs (Millennium Development Goals), including headcount poverty reduction, have been attained well ahead of timeline.
Mandatory environmental risk assessment routines in loan appraisal processes take account of sustainability concerns; promotion of SME and green financing is supported by low-cost refinance lines within monetary and credit growth envelops of price and macroeconomic stability focused annual monetary programmes. Green financing promotion efforts have already yielded substantial progress in solar and bio-mass based renewable energy generation, installation of industrial effluent treatment plants, replacement of traditional polluting brick baking  kilns with energy efficient modern ones, and so forth.
Inclusive financing is bolstering financial stability by widening and diversifying the asset and deposit bases of lending institutions, reducing their credit and liquidity risk exposures. Inclusive financing shielded small farms and businesses in Bangladesh from any credit crunch in the last global financial crisis, when rather than needing any support or bailout for itself, the financial sector in Bangladesh was able to help out export manufacturing and other sectors affected by the global crisis. Domestic demand-driven output activities remained well supported by inclusive financing, compensating for growth sluggishness in exports.
Embedding of inclusive, sustainability supportive aspects in BB's monetary policies and programmes came about in a consistent package of steps, starting with setting mindsets and motivations right by instilling in the financial sector the ethos of socially responsible financing focused towards supporting environmentally sustainable output activities and away from financing of speculative profit seeking or wasteful ostentation.
This has successfully enthused banks and financial institutions into spawning new initiatives of reaching out with financial services supporting productive and green initiatives in underserved communities and sectors, using cost-efficient mobile phone/smart card and other off-branch service delivery channels enabled by a BB-led massive upgrading of the financial sector IT infrastructure. Environmental risk assessment guidelines, introduced by BB, promotes green financing by putting lower risk weights on the green options than on their polluting alternatives.
This is supplemented further by modest macro-prudential policy tweaks favouring green financing, like mandatory high margin requirement on financing of personal cars etc., leaving mass transit vehicles free of such conditionality.
BB is engaging intensively with relevant domestic authorities and external development partners in devising feasible and appropriate support schemes for the various inclusive and green financing initiatives. Further, BB is participating proactively in international forums advancing the causes of inclusivity and environmental sustainability like the AFI, UN Global Compact, UNEP etc. for mutual learning and experience sharing.
To summarise, BB's monetary policies and programmes explicitly include aspects supportive of inclusive and green output initiatives, something BB sees as essential in managing climate change-related and environmental degradation-related risks. Results thus far are positive and encouraging in regard to upholding of price and macro financial stability. Monetary policy approaches of many other developing economy central banks have variants of similar inclusiveness and sustainability supportive aspects.  Mainstreaming of this approach in monetary policies of developed economies as well may be warranted by the imperative and urgency of environmental sustainability.
Price stability, the primary objective of monetary policy, does not occur in isolation and depends on stability in other parts of its environment. Financial stability is a crucially important requirement for price stability; monetary policies need therefore be somewhat unorthodox and mindful about helping uphold and bolster financial stability. Leaning against the wind or acting counter-cyclically may not be enough when wind of financial instability begins blowing strongly. It is better to keep on building up defences in advance.
In Bangladesh experience, we have found inclusive financing a good instrument of promoting both output stability and financial stability. Inclusive financing does this by diversifying asset portfolios and deposit bases of financing institutions amongst myriad small new inclusion clients, reducing credit and liquidity risks and generating inclusive growth. This policy campaign has paid us well as reflected in terms of six-plus per cent growth with stable inequality of income index, stable exchange rate leading to trebling of foreign exchange reserves, falling inflation, reducing trade deficit, maintaining current account surplus and consistent improvement of social development indices in particular sharp reduction in poverty over the last half a decade or so.     
Dr. Atiur Rahman is the Governor of the Bangladesh Bank. governor@bb.org.bd