The recent global financial crisis in the developed countries has brought into focus the role of a central bank, particularly in a developing country like Bangladesh, to become broader rather than narrower to cope with the challenges of shrinking demand both in the global and domestic contexts. The narrow response by a conventional central bank has been to create more money and ‘helicopter’ the same to affected financial institutions without impacting greatly the real economy. On the other hand, the innovative central banks took the newly created money with ‘bullock carts’ to the ground and impacted real economy both from demand and supply sides. In the process, not only the domestic demand has been upheld but also the supply chains remain robust. The end result has been the desired stability of the economy with expected growth process remaining in motion without enhancing inflationary pressure. The stability outcomes of the latter approach of central banking have indeed been stunning, particularly in Bangladesh. I will explain this with examples in a latter section.
Why should a central bank play a broader role?
We are already in the era of sustainable development. All countries have agreed to attain sustainable development goals by 2030. Sustained development, however, requires participation of broad segments of population. This participation should not be only as consumers or employees but also as entrepreneurs, even if it is just small or micro-entrepreneurship. Fostering such entrepreneurship requires more than a stable macro-economic situation. Moreover, the stability of the macro-economy, especially in the context of globalisation and turbulent global economies, itself depends on a vibrant domestic economy. And if that domestic economy anchors on inclusive growth processes aided by financial inclusion, it is even more desirable. Thus, if the central bank has to play a critical role in sustaining development, it needs to take on a role broader than traditionally been ascribed to it.
Banks are very important players in an economy. Their role is not limited to only providing finance. They also have a screening function, i.e., they have to distinguish between good and bad investment proposals. In carrying out this function, banks often come across investment proposals that may be innovative, whether in terms of introducing new products and technologies, or exploiting new markets. Thus, they are in a good position to foster innovation in the country, both directly by funding the investors as well as indirectly by identifying policy measures that may help such innovations. In fact, the banks become aware of the issues the investors are facing through interactions with their clients. The banks then can bring these issues to the attention of the policy makers. All this means that, if the central bank takes on a broader developmental role, it can better appreciate this work of the banks and help foster it. In addition, the central bank can instil motivational ethos in the minds of the bankers about the benefit of, say, the inclusive finance through deeper interactions with them.
The central bank, both on its own, as well as through its interaction with the financial sector players, has access to a wider set of information on what is happening in the economy. Thus, it is in a good position to think strategically about future development paths of the country. However, this potential of the central bank may remain under-utilised if it takes a narrow view of its role in the economy.
Finally, good practices in government are sometimes introduced in an unlikely part of it. In other words, a government agency may start doing something innovative in an area which is not in its core area of competence or responsibility. But it is doing it because it is one of the more dynamic, forward-looking and competent agencies in the government. Once it introduces the innovation, others may learn from it and, at some stage, it may be picked up by the agencies whose work more closely relates to it. Thus, the pioneering agency acts as an incubator of good ideas which is picked later up by others. The central bank, especially in Bangladesh, is one of the more dynamic agencies in government and thus it makes sense for it to play the role of innovator and pathfinder.
Pro-active initiatives taken by Bangladesh Bank
I had the best fortune of leading the central bank of Bangladesh during the heated period of global financial crisis. Despite many challenges, I could motivate the senior central bankers to go for financial inclusion and green financing as a strategic policy tool to embark on innovative central banking. As a part of this strategy, the central bank went for strengthening the financing capacities of the commercial banks by setting up a number of refinancing facilities for inclusive and green growth. The central bankers were motivated to start moral suasion of the commercial bankers to trigger their interest in innovative inclusive and green products. Besides issuing necessary regulations for the innovative products, the central bank also took initiatives to bring changes in the mindset of the supervisory apparatus to generate information on whether banks were doing enough to promote the innovative products and, if they were not doing enough, they were encouraged to do so. In addition, the banks were incentivised to go for these innovative products by awarding the best performers and giving priority to approval of new branches. The better performers were also given higher marks while preparing their supervisory ratings e.g., CAMELS rating. The central bank also shared the new information generated from the banks with the planners and policy makers involved in the preparation of annual budget, five year plans and long term vision. The central bank inputs were also provided to the planners who were engaged in preparing SDGs for Bangladesh. The central bank also advocated inclusive and green growth with the government, businesses and citizens. In addition, the incentives provided by the central bank to the exporters in the form of lower cost loans including export development fund and green financing support helped improve our export earnings. The central bank also improved payment system to encourage remittance earners to send money through formal channel. All this helped increase foreign exchange reserve manifolds which provided a big cushion against macroeconomic instability and given it credibility and professionalism which other institutions had the ability to shape public opinion than the central bank.
The central bank of Bangladesh played a highly pro-active role in widening the advance opportunities for the poorer population segments. The most important move which Bangladesh Bank took for the unbanked was to ask the banks to open ‘no-frill Ten Taka accounts’ for the farmers. Later similar accounts were opened for the recipients of social protection and also for the street cleaners who had no access to the banks. Even the street children were provided the opportunity of having bank accounts. In addition, 1.2 million school students have opened joint bank accounts with either of their parents. The Mobile Financial Services and Agent Banking have simply revolutionised the access to payment system by providing nearly 50 million digital bank accounts with nearly five million transactions a day. The money transmission channels in Bangladesh have been vastly expanded reaching almost every nook and corner of the country. In the process, the remittance of money both from the domestic and foreign remitters has not only been formalised but also made faster suiting the needs of the recipients. The small businesses have also been benefiting from the faster and secure payment system regulated by the central bank. Moreover, the revamping agricultural credit to the farmers (including sharecroppers) by all types of banks (including private and foreign) and as well as Micro-Finance Institutions as linked delivery agents has greatly improved food security and food price stability. Also the pro-active moves taken by the central bank of Bangladesh in directing SME financing to small entrepreneurs including women entrepreneurs has been promoting output, employment and income generation of thousands of new entrepreneurs who were earlier bypassed by the financial institutions. The innovative move by the central bank to establish a sustainable finance department helped promote green financing supporting environmental sustainability. This particular move by the central bank of Bangladesh “placed Bangladesh on the global map by championing the development role of central banks in advancing financial inclusion and green finance”( Simon Zadek, Co-Director of UN Environment’s Inquiry into the Design of Sustainable Financial System, published in the” Sustainability” of Reuters on 15 August 2017). As a part of this campaign for more inclusive sustainable finance the central bank also promoted corporate social responsibility programmes by banks to provide scholarships to the students of extreme poor families and health support to the unserved and underserved segments of populations. The central bank has been playing this developmental role without compromising its core role of stabilising the value of money by controlling inflation through prudent monetary policy. It has also been able to maintain current account surplus for the entire period of global financial crisis leading to extraordinary stability in exchange rate and speedy build-up of the foreign exchange reserve. As a result the country received positive stable rating from S&P and Moody’s leading to increased foreign direct investment in Bangladesh. Besides sustain GDP growth and stability in inflation and exchange rates, Bangladesh witnessed a steady fall in the poverty rates (both general and extreme) and rise in life expectancy going up to 72 years lately.
All this speaks about positive development outcomes in Bangladesh where its central bank also has been playing a complementary role with the government which is, of course, paying focused attention to inclusive and sustainable growth.
The developmental role of the central bank has, of course, has been centred on its farsighted policy strategy of financial inclusion for which it has been globally recognised and rewarded. The quiet revolution of financial inclusion has preserved, in the midst of global financial turmoil, in bringing formal financial services to thousands of households and small entrepreneurs who previously never had a relationship with a financial institution. However, we need not be complacent about these spectacular gains in our financial sector as this requires continuous nurturing and supervision by the regulators. The financial inclusive products must be tailored carefully to meet the demand of the recipients and at a reasonable cost. The need for continuous financial literacy can also be hardly overemphasised. A word of caution about the quality of corporate governance of the financial institutions may be imperative for desired financial inclusion as well. The falling net profit of banks due to greater provisioning for rising non-performing loans calls for a more prudent regulatory intervention. The right kind of inclusion cannot be ensured without right kind of supervision by the regulators. I only hope the central bank of Bangladesh remains focused on its innovative developmental role without compromising its core role of providing prudent monetary policy keeping in mind its mandated strength of promoting “national interest” at any cost.
The author is an eminent economist and former Governor of Bangladesh Bank. He can be reached at: email@example.com.