Financing Inclusive Low-Carbon Development: The Role of Central Bank of Bangladesh and Infrastructure Development Company Ltd

Submitted by Julia Barrott 20th November 2015 15:44

Introduction

How can we deliver climate finance to those who need it most? We examine the choices countries make in financing low-carbon resilient development, focusing on experiences in Bangladesh.

Case studies of two financial institutions, Central Bank of Bangladesh and Infrastructure Development company Ltd. (IDcoL), illustrate how core actors and incentives shape the delivery of climate finance, and how well-designed systems and carefully chosen intermediaries can provide lower-income communities with access to this finance. Our analysis suggests some key principles and strategies for ensuring finance are inclusive and reach the poorest. 

The summary of this report is provided below.  The full report can be downloaded from the right-hand column of this page or via the link provided under further resources.

Report Summary

Low-carbon resilient development (LcRD) integrates developing countries’ responses to the combined challenges of mitigation, adaptation and sustainable development. In Bangladesh, where around two fifths of the population is ‘off grid’, LcRD is the agenda behind policies aimed at widening access to energy. Government targets include “electricity for all by 2021” and the generation of 10 per cent of electricity from renewables by 2030.

In this report we present case studies of two financial entities that channel funds to implement these policies: The Central Bank of Bangladesh and the Infrastructure Development Company Ltd (IDcoL). Taking a comparative approach, we examine the choices these two institutions make in harnessing integrated finance sources, in identifying intermediaries that prioritise getting funds to the poor and deploying instruments and financial systems that can be targeted to the needs of the most vulnerable.

Assessing effectiveness

We also focus on two projects: Solar Home Systems (SHS), one of the largest off-grid electrification initiatives in the world, and Solar Irrigation Pumps (SIps), a more recent initiative aimed at farmers. Using evidence from stakeholder interviews and discussions with end users, we assess the effectiveness of the two institutions’ finance programmes for these projects in terms of:

  • Targeting the poor: are funds targeted to those who need them most?
  • Leveraging finance for low income population: are public funds able to generate more funds for poor from other sources?
  • Generating appropriate finance: do the terms of finance meet the specific needs of poorer people?
  • Facilitating co-benefits: does finance translate
    into LcRD outcomes, for example into community resilience to climate change and better livelihoods?

Case study: Central Bank of Bangladesh

The Central Bank of Bangladesh provides credit for investments in LcRD projects primarily through loans to financial institutions (FIs), at concessional or market rates. FIs then lend to end users, either directly or through further credit linkages with MFIs, NGOs or others. Commercial banks have innovated on this model by introducing composite lending of SIps loans with crop loans, the latter designed to improve farmers’ incomes and so their creditworthiness.

The Central Bank’s regulatory role has enabled it to gradually change FIs’ behaviour, ensuring access for consumers who would otherwise have remained outside ‘mainstream’ banking; its strategy began with green banking guidelines and concessional loans, progressing to mandatory green lending targets. However, the Bank is limited in its ability to reach the very poorest, since it must seek financial viability and, unlike IDcoL, is unable to offer grants.

Case study: Infrastructure Development Company Ltd (IDcoL)

IDcoL was created to translate large-scale donor funding into small-scale finance for renewable technologies. It does this through partner organisations such as micro finance institutions (MFIs).

IDcoL has deployed a ‘one stop shop’ model combining partial, phased subsidy and refinancing with complementary services supporting market creation. Subsidies for SHS are now being phased out, and it remains to be seen whether this is a step towards market sustainability or whether removing grants just as the technology is becoming affordable for lower-income households is a retrograde step with implications for the viability of IDcoL’s chosen model.

Recommendations: key findings and conclusions

Making appropriate choices in developing finance for the poor.

Selection of intermediaries should take into account:

  • Market stage: for example, MFIs are established in poorer communities and so better equipped to deliver finance in early-stage markets, but as markets mature banks can provide cheaper capital to end users.
  • Actors’ financial needs and status: for example, individual farmers cannot give the risk guarantees FIs require for SIps loans, but FIs have made the loans accessible by targeting farmers’ co- operatives who can provide group guarantees.

Financial instruments should include:

  • Grants in the early stages, for market development, that are later phased out to avoid market distortion; grants should continue, however, for the poorest.
  • Concessional loans to provide lower-income groups with appropriate finance; that is, long-term, flexible finance with affordable repayments and limited security requirements.
  • Risk mitigation instruments to ensure channeling finance to the poor is less risky for the financiers.
  • Social protection instruments and safety nets, to include the ultra-poor.

Appropriate planning systems should include:

  • An integrated and holistic financing model that can create win–win opportunities for all actors in the value stream. Such models can provide a combination of services including market creation, establishing delivery networks, quality assurance, access to capital and training.
  • Clear and phased regulatory policies and signals, as these can be instrumental in engaging diverse actors that remain concentrated in mainstream sectors. In some cases, it may require setting up mandatory requirements.

Incentivising pro-poor choices:

  • Policy incentives: higher-level policies, including government targets and fiscal measures as well as simple political will, incentivise actors at all levels and scales.
  • Economic incentives: all actors need economic incentives, but financial intermediaries in particular need concessional financing, so that entering riskier markets makes commercial sense to them.
  • Knowledge and capacity incentives: non-financial support such as training and technical assistance can encourage local engagement and private sector investment.
  • Reputational incentives: official and public recognition can encourage the involvement of commercial players such as banks.

Further resources