Inclusive Green Finance

Inclusive Green Finance

            *Amish Dhungel

Green Finance

Green Finance refers to initiatives that promote green investments. It means more capital flows to sustainable sectors like renewable energy, clean transportation, sustainable water management, etc. It aims at increasing financial flows to sustainable development priorities that have positive and durable environmental externalities. 

The objective is to generate environmental benefits as part of a strategy to attain inclusive, resilient, and sustainable development. The crux is to achieve sustainable economic growth with better managed environmental and social risks. As such green finance covers a wide range of financial product offerings including banking, investment, and insurance products such as green bonds, green investment funds, climate risk insurance, etc.   

The concept of Green finance gained global attention after the declaration of the United Nations Sustainable Development Goals 2015 and the Paris Climate Agreement 2016.  

Financial Inclusion

Financial inclusion is a multi-faceted concept that relates to the access, usage, and quality of financial products and services to households and businesses. It means that individuals and businesses have access to meaningful and affordable financial products and services. It ensures that customers regardless of their geographical location, ethnic, social-cultural, educational, or economic background have access to suitable financial products, ensuring fairness in service delivery, at a reasonable cost.

Financial inclusion has become a favorite buzzword of government and regulators because of the role it plays in reducing poverty, boosting prosperity, and achieving macroeconomic stability. Basically, financial inclusion is measured in terms of access of people and business to a bank account. Having a bank account means that people can save, send, and receive payments and are connected with a wide range of services that the financial industry offers. Such an account serves as a starting point for the users to facilitate day to day living, make use of wide varieties of financial services, make immediate and long-term financial plans, etc.

Inclusive Green Finance (IGF)

Globally, green finance and financial inclusion have been gaining popularity. Nepal also has started to witness green finance practices. Besides these, global attention has been shifting towards developing and adhering to the concept of Inclusive Green Finance (IGF). Before we delve into the concept of IGF, let us go through the following news:

 · In 2017, the seasonal flooding in South Asia affected more than 16 million people, causing death casualties of about 500 people. Amongst others, Nepal, Bangladesh, and India were severely hit displacing many families, causing severe food shortages, etc.

·  The heat wave in India killed 90 people in the summer of 2019. The temperature reached 49 degrees Celsius in the northern part of the country reaching very close to all-time record of 51 degrees Celsius in 2016.

· Recurring landslides and floods caused a big loss of life and properties in the Sindhupalchowk district of Nepal. As many as 74 people lost their lives and 41 people were reported to be missing in the district as per a report on September, 2020.

It is well understood that climate change has been a major cause of extreme weather conditions around the globe. Climate change has been threatening the food supply, forced people to abandon their homes, jeopardizing the health of the victims, etc. In most of these unfortunate events and the news listed above, it is poor and vulnerable people who have to face hardship. And as most of the poor people have a heavy reliance on agriculture for food and income, the harsh climatic condition can be devastating leading to the deepening of poverty.  

With climate change and global warming, the frequency of events such as landslides, flooding, storm, etc, and the magnitude of losses from these are increasing. This has pushed millions of people below poverty lines. Such disasters propagate inequality and poverty, which reinforce each other, creating a vicious cycle whereby the poor population suffers more as they are overexposed; have less capacity to cope and recover. In most of the cases, due to inadequate post-disaster social protection, such population will face a permanent impact on health, job, education; forcing them into poverty traps. As such climate change not only threatens long time effort of the government to reduce poverty but also causes an extra burden on the low-income population.

We can conclude from the above that:

·      Poor countries are more affected by climate-related disasters as they are less prepared and have a poor support system,
·      Mostly the victims of such incidents are people from poor and vulnerable levels, 

·      Victims are pushed back into the poverty trap and there is a high chance that they will be financially excluded

How Inclusive Green Finance (IGF) is gaining momentum

Inclusive Green Finance is a new policy area popularized by Alliance for Financial Inclusion (AFI) member institution to adopt policies, regulation, and national strategies to "mitigate or build resilience to sweeping environmental, health, social and economic effects of the climate change".

IGF combines the concept of green finance and financial inclusion policies to develop integrated inclusive green finance (IGF) policies. It makes use of the financial services and digital finances to mitigate the shocks from climate change, thus enhancing the resilience of the vulnerable population against the climate related economic shocks.

It is no doubt that financially included population are habituated in saving, credit, insurance, making transaction, use of digital channels, etc. The financially included population is better positioned to undue financial shocks. For eg, families with a higher rate of savings can smoothen consumption even after the shock and withstand the increase in food prices. Similarly, access to micro-credit can assist the poor household to enhance resilience via access to fertilizer, improved seeds, etc. Likewise, micro-insurance and weather-based insurance can provide security to poor families. Besides, in the aftermath of the crisis, access to a bank account can enable poor people to reach out for subsidies or grants from the government or donor agencies. Similarly, in the presence of robust digital financial inclusion, post-disaster social payments can be made in no time. A recent example is the use of digital finance by the policymakers to enhance the resilience of the population as against economic distress caused by Covid 19. Similarly, micro-credit, micro-insurance, etc can be made available to the poor population with the usage of Digital Financial Services in no time.

It is understandable that when low income and vulnerable people are financially included, they better prepare themselves to withstand climate-driven events like floods, cyclones, landslides, etc. Besides these, when the bank and financial institutions(BFI) arrange for green finance products like solar powered energy systems, clean stoves, subsidized lending in agriculture and animal husbandry, etc, it will ensure that the bottom of the economic pyramid population is included to ensure green financial inclusion. Thus financial initiatives such as micro-lending, savings, micro-insurance, clean energy lending, green lending, etc that aim to protect the poor and vulnerable population from unwanted environmental and climate change hazards is known as inclusive green finance. In another world, inclusive green finance can also be understood as 'scaling-down' of the green finance initiatives to include the bottom of the economic pyramid.

Besides all these, effective implementation of IGF initiatives will ensure overall financial and microeconomic stability, mitigate the risk of high inflation emanating from climate change, and other environmental risks. 

Framework of Inclusive Green Finance

The concept of green finance and inclusive green finance has also been gaining the attention of the policymakers throughout the world. Though these two concepts are relevant and inter-related to each other, the term green finance caters to the financing needs of large scale green investment, contrary to the inclusive green finance, that advocates for green finance initiatives to include poor people and enhancing their resilience to climate change.

IGF started as a new policy area in September 2017 as Alliance for Financial Inclusion (AFI) member countries adopted the Sharm El Sheikh Accord on Financial Inclusion, Climate Change, and Green Finance. This was further developed as Nadi Action Agenda laying down priority areas for AFI's work on Inclusive Green Finance. The framework aims to guide central banks and other stakeholders towards promoting Inclusive Green Finance. The accords is built upon Maya Declaration that enables AFI member countries to make concrete financial inclusion targets, implement policy changes, and share policy updates on financial inclusion.

IGF is categorized into four types known as the 4P framework which includes promotion, provision, protection, and prevention. Within these the whole range of activities that financial regulators can take under inclusive green finance can be classified.

4P framework on IGF

 

         Promotion

Promotion-related initiatives incentivize the private sector to offer financial products and services for green projects or related climate action activities to the qualified beneficiaries. It includes initiatives such as moral suasion, awareness-raising, capacity building, interagency coordination and collaboration, data collection, etc. For e.g., Bangladesh published a Quarterly report on Green Banking Activities of Banks and Financial Institution and Green Refinance.

   Provision

Provision policies help ensure that qualified beneficiaries avail financial resources for the green projects and other climate-related activities. Such measures involve provisioning of lending quotas, provision of refinancing, creation or investment fund, etc. For e.g., Nepal Rastra Bank has made it mandatory for BFI to lend 10% of their portfolio to energy projects. Similarly, it also has subsidized loans for biogas, waste treatment plants, solar energy, etc.

Protection

Measures such as climate-related insurance and risk management products, credit guarantees, social payments, and other mechanisms are used to reduce potential financial risk. For e.g., the Central Bank of America subsidizes approximately 50% of insurance policies of agricultural climate insurance products. Similarly, Central Bank of Nigeria absorbs 50% of the loss if a small farmer defaults on a loan.

Prevention

Similarly, policies are also adopted to avoid undesirable outcomes by lowering financial, social, and environmental risks. For e.g., the Environmental and Social Risk Management Guidelines issued by the Nepal Rastra Bank, 2018 can be referred to as one of the prevention interventions. The guideline aims to establish the Environmental and Social Risk Management Framework as the standard process for evaluation and integration of environmental and social issues in the functioning of banks and financial institutions (BFIs) and requires BFIs to develop and implement an Environmental and Social Management System (ESMS) consistent with local environmental, social laws and regulation.

  

The guidelines focus on assessing air emissions and air quality, water use and conservation, wastewater and water quality, solid wastes, labor and working conditions, biodiversity and ecosystem services, culture, and natural heritages, etc. Such guidelines have been issued by other countries like Brazil, Pakistan, Bangladesh, Paraguay, etc. 

National Strategies

Besides requiring member institutions to execute various activities under 4P's framework, AFI also emphasizes its member institutions to link their financial inclusion goals with climate change via a national strategy. Such strategies might be incorporated into National Financial Inclusion Strategies or other financial sector strategies.

Most of the AFI member countries have done so, some of them being Fiji, Rwanda.  Similarly, countries like Nepal, Bangladesh, Nigeria, Morocco, etc have planned to link financial inclusion and climate change. For e.g., our neighboring country Bangladesh in its First Strategic Plan (2010--2014) has made a connection between financial inclusion and climate change. It gave due importance to the need for agriculture and SMEs. The second strategic plan (2015-2019) aims to promote socially responsible, inclusive, and environment-friendly finance for sustainable development. As such development of national strategies and the propagating of such strategies in the policies and practices is important.

Conclusion

Climate change can threaten our progress in financial inclusion and other achievements in the financial sector. In quest of developing a resilient system, we need to spearhead the policies and practices to mitigate the impacts of climate change. For a developing country like ours which is at high risk for climate change-induced disasters, with 39.1% of the population still assumed to be outside of the financial channel and 18.7% of the population below the poverty line, it is high time for us to respond with strategies, policies, and regulations to move forward towards inclusive green economies.

As such central banks, supervisors/regulators, and governments should aim in developing a financial system that is resilient and well prepared to absorb climate-related shocks. As guardians of financial stability, it is no doubt that central banks should have more concerns for inclusive green finance. Appropriate policies and proper cooperation with counterparties, regulators/supervisors in other countries, and with global policy-making body like AFI is necessary to achieve IGF.

As an evolving field of study with huge importance, IGF is certain to gain momentum in the future. As such IGF initiatives should be able to garner adequate collaboration and coordination among the stakeholders at the international level, ensure knowledge/experience sharing, capacity building of the authorities, etc. All these will enable us to move towards a resilient financial system for the bottom of the pyramid.

References:

Pictures/graphics credit: AFI

• www.afi-global.org
• Guidelines on Environmental & Social Risk Management (ESRM) 2018, Nepal Rastra Bank
• g]kfndf ljQLo kx'Frsf] l:ylt ;+lIfKt cWoog @)&^, g]kfn /fi6« a}+s
• Sustainable Development Goals | United Nations Agenda 2030‎
•  www.unescap.org

Published in Upahar(Magazine of Economics and Management), Souvenir of Rastriya Banijya Bank Limited, 2077

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Embracing Digital Finance System Need Of Hour

Embracing Digital Finance System Need Of Hour

Financial inclusion can be defined as a state whereby Individuals and businesses have access to meaningful and affordable financial products and services. It means that customers regardless of their geographical location, ethnic, social-cultural, educational, or economic background have access to suitable financial products while ensuring fairness in service delivery at a reasonable cost.

The popularity of financial inclusion is because of the role it plays in reducing poverty and bringing prosperity. Financial inclusion is generally measured in terms of access of people and business to a bank account. Having a bank account means that people can save, send and receive payments as such people are connected with one of the important parts of life-- banking. Such an account serves as a starting point for the users to facilitate day to day living, make immediate and long-term financial plans, and make use of a wide variety of financial services.

Access to finance at present is not only limited to having a bank account in physical banks. With the use of modern technology in the field of banking and finance, financial services are offered through mobile phones, personal computers, the internet, or via linkage of the card to a digital payment platform known as digital financial services (DFS). For any product offerings to be called DFS, it should enable the users to perform basic banking functions like payments, savings, borrowings, etc making use of the internet, and without having to go to the physical branch location. DFS is a broad terminology and also includes Mobile Financial Services (MFS) which means the use of a mobile phone to access financial service and execute financial transactions.

Financial inclusiveness throughout the globe has been low. The World Bank estimates that around 1.7 billion adults worldwide do not have a basic transaction account. In Nepal, around 60 percent of the population is still said to be outside the coverage of the formal banking channel. Low financial literacy, complex KYC requirement, unequal access to infrastructure, convenience in using informal market tools, lack of trust, and inadequate financial awareness are the reasons for staying outside banking services.

Government of Nepal (GoN) has introduced measures to increase the access of people to financial services. It has planned to open a physical branch of commercial banks in all local levels of the government. With about 81 percent of Nepal's population living in rural areas, the increase in number of banks in local level will increase bankable population. Banking at doorsteps will create convenience for the users which were a matter of privilege some years back.  Similarly, the government has launched an opening bank accounts campaign targeting every citizen. To ensure its effectiveness the process of opening bank accounts has been simplified. Opening the bank account earlier required a copy of citizenship but now can be done just by presenting a copy of the driving license, national identity card. Similarly, such accounts will receive a deposit of Rs. 100 from the bank’s side.

The government has also introduced the 'Digital Nepal' campaign which highlights the role of digital financial services to promote digitization of financial transactions. It recommends increasing the limit of digital transactions, reduce the cost of digital financial transactions, issue of national biometric cards, and introduce telecommunication companies into the payment industry. The government, together with other stakeholders can create an enabling environment to promote digital financial services. For instance, recently Bangladesh introduced the 'Digital Bangladesh' campaign which largely increased financial inclusion. Bangladesh, in 2018 had 47 percent of adults in the financial channel, a 10 percent increase from 2017. Such progress was due to a larger portion of the population having access to MFS. Such stories can also be found in countries like Kenya (mPesa), China( Alipay, Wechat), etc. Our own homegrown MFS providers include e-Sewa, IME pay, sparrow pay, etc. that have been gaining momentum.  

A large unbanked population together with a predominantly cash-based economy has been a constant problem to the Nepali financial system for long. A solution can be the extension of digital financial services throughout the country. With mobile penetration rate greater than 100 percent, declining cost per unit of data, high-speed internet solutions, expansion of physical infrastructure, 50 percent internet penetration rate, the environment is conducive for the expansion of digital financial services. This context is more suitable to popularise mobile financial services. The population base with wide access to mobile and internet can be tapped to open digital wallets which would be game-changing to enhance financial inclusion in Nepal. Licensed mobile financial services providers from Nepal Rastra Bank in the form of PSP’s and PSO’s can tap the unbanked population across the country.

Digital finance is instrumental to ensure broader financial inclusion. Similarly, in contrast to the traditional brick and mortar banking, digital finance is more affordable and convenient.  The major advantage of digital finance comes from its ability to offer product offerings at an affordable price, ensuring interoperability across various service providers. It also enables regulators to easily check the flow of black money or undue financial transactions. Another advantage would be the efficiency factor. The use of innovative digital financial services can have a long-lasting positive impact on banking performance.  

Access to digital finance is likely to boost the gross domestic product of the economy by providing service users with a wide range of digital finance products and services. Under banked groups like SME’s, women, and the population on the bottom of the pyramid will have access to financial services. This will boost aggregate expenditure leading to a positive contribution to GDP and will also contribute to the reduction of the poverty level.

The government should build coordination with concerned stakeholders and create an enabling legal and physical infrastructure to promote digital finance in the country. Making use of the technology to offer existing banking solutions and leveraging the benefit of technology to offer mobile financial services across the country will significantly enhance financial inclusion in the country. Such measures will significantly add to the government’s mission of ‘Digital Nepal’.

(The author is an Assistant Director at Nepal Rastra Bank.)

Raising Financial Literacy

Amish Dhungel and Dwaipayan Regmi

On observing the lifestyle of the villagers, they seem to have no financial plans. They spend money right away, with no vision for the future, and are in no mood to open a bank account. This vividly represents the poor level of financial planning on account of poor financial literacy.

Financially literate means consumers are able to make wise choices in using financial products, make sound financial decisions, and optimize resources through better financial planning.

With sound financial literacy, individuals can eradicate financial distress in the future. It also means ensuring better financial discipline and making better use of scarce financial resources.

Studies indicate that financial literacy in Nepal is low. Only 45% of the adult population has a bank account, as per the World Bank report of 2017, which indicates a low level of financial literacy, though it could also be because of poor financial access.

Ensuring a greater deal of financial literacy in Nepal requires the active engagement of three parties - regulatory agencies, Banking, and Financial Institutions, and educational institutions.

Nepal Rastra Bank, as a regulatory agency, has shown ample interest in promoting financial literacy.

It has been organizing financial literacy campaigns throughout the country. Similarly, it has been organizing financial literacy programs, celebrating International Money Week, implemented a Clean Note Policy, developed promotional materials relating to financial literacy, adopted stringent Client Protection measures and formulated a financial literacy national strategy.

Similarly, a directive issued by the central bank provides financial literacy and financial consumer protection. It has instructed licensed entities to practice simplified and transparent banking practices and mandatorily organize financial literacy programs.

Following the instructions by the bank, BFIs (banks and financial institutions) have been allocating some of their resources for financial literacy campaigns as part of their Corporate Social Responsibility (CSR).

Similarly, the regulator of the securities market in Nepal, SEBON, is also promoting financial literacy. 

Recently it took membership of OECD INFE (International Network of Financial Education), making it the first organization from Nepal to forge such a partnership. It has also organized an international conference on Financial Consumer protection and financial education in coordination with the OECD.

Another regulatory body in the financial sector that looks after the insurance sector, Rastriya Beema Samiti (Insurance Board), also has financial (insurance) literacy in its agenda. Similarly, insurance companies licensed by the board have also been found organizing insurance literacy programs in the country as part of their CSR initiative. However, the education sector has lagged behind in imparting basic financial knowledge to the students. 

It is important to include financial education in the syllabus of the educational institutions as knowledge and skills transferred at a young age will come handy throughout life. As such, students have little knowledge about general banking skills. They are not taught about saving, investment or entrepreneurship. They don’t have proper knowledge of what the BFIs do. Even though commercial banks have reached almost every local level, people prefer to keep money at home. When the salary gets credited into their account, they rush to the banks the very next day and take out all the money to the last paisa.

The onus lies on the educational institutions to impart financial knowledge to the students. A coordinated approach must be taken by the central bank, Ministry of Education and educational institutions to develop a financial literacy curriculum so that students are not shut out from another life-saving skill. For the time-being educational institutions can launch financial literacy programs themselves, or take the help of the BFIs, which are now present in almost all the local levels. Such initiatives should also be a priority of the local level Gaupalikas and Nagarpalikas. Local-level bodies can inculcate financial literacy not only to the school level students but also to every household by setting up various groups.

Financial literacy is a must for society’s upliftment. The government has made financial literacy and financial inclusion a priority. In addition to bank branches, it has also given priority to use of alternative channels to increase financial access. Likewise, the use of IT-based channels like mobile banking, internet banking, and branchless banking has been gaining popularity in Nepal. All these reveal an increase in financial service access to the customers.

However, supply requires a demand for service delivery to be effective. Stakeholders should consider imparting financial literacy to the targeted customers to ensure that the customers receive the services well. This not only ensures the financial well-being of the customers but also ensures market expansion, capital formation and proper use of scarce resources while strengthening the economic sector and stability. All these help in the sustainable growth of the economy.

Studies indicate that financial literacy in Nepal is low. Ensuring a greater deal of financial literacy in Nepal requires the active engagement of three parties — regulatory agencies, Banking, and Financial Institutions, and educational institutions.

Dhungel is Assistant Director at NRB and Regmi is Assistant Manager at Rastriya Banijya Bank