Like Thailand, Bangladesh is suffering from prolonged political unrest and subdued economic activity.
For a time earlier this year it seemed Moody’s Investor Service might downgrade the country's credit rating due to the ongoing tensions on the ground, although in the end it held off from doing so.
Opposition party-led strikes have weighed on the economy, prompting the International Monetary Fund in March to clip its growth forecast for the fiscal year to June-end to 6% from 6.4%. The Bangladeshi government had been targeting a 7.3% growth rate.
And as Bangladeshi exports, investment, and growth have turned down, so non-performing loans have risen at some state-owned banks. Among them is Eastern Bank, where NPLs jumped to $66.5 million in 2014 from $48.1 million in 2013 and $38.5 million in 2012, according to data from SNL Financial.
FinanceAsia will be running its third annual Bangladesh Investment Summit in Singapore on September 1st. Visit www.bangladeshinvestsummit.asia for more information.
However, there are reasons to be optimistic about the country’s long-term future. Although Bangladesh’s economy will likely continue to be reliant on clothing and apparel manufacturing for some time, rising incomes, improved regulation, and better infrastructure offer the promise of a shift up to higher value-added sectors.
Bangladesh is the world’s second-largest exporter of readymade garments after China. The industry accounts for 80% of its exports and employs 3.5 million workers, according to the Bangladesh Garment Manufacturers and Exporters Association. Of these 3.5 million workers, 80% are women, according to the Partnership for Cleaner Textile group (PaCT).
The industry is worth some $25 billion and has helped to bring millions of Bangladeshis out of poverty.
There are environmental downsides, though, since manufacturing plants require exorbitant amounts of water. For clothes manufacturing, water is needed in the dyeing stage for both yarn and fabrics. The washing-dyeing finishing (WDF) mode of the textile value chain employs 200,000 workers and is growing at a rate of 10% per year, according to the PaCT.
These WDF factories are the country's second-biggest polluters, consuming 1.5 billion litres of groundwater annually and contaminating surface waters through inadequate effluent treatment. The issue in Bangladesh is that the water, once used, becomes polluted and is then dumped back into the rivers. The PaCT’s estimates this negatively impacts some 12 million people.
The PaCT also notes that even though groundwater levels are falling by 2 metres per year, many mills still use 250 to 300 litres of water per kilogramme of fabric, whereas other global players use around 50 litres per kilogramme.
The enormous amount of pollution created by wastewater is a worry for large global retailers that partner with Bangladeshi manufacturing plants, due to growing consumer awareness of the production processes and a growing desire for more ethical branding.
“If you’re a retailer in Japan or Europe, they’re very concerned about the whole process, whether the manufacturers use [effluent treatment plants], where the cotton comes from — organic cotton is very popular right now,” Francois de Maricourt, HSBC’s chief executive officer in Bangladesh, told FinanceAsia.
As such, the Bangladeshi government and regulators are taking a harder look at green issues. By January 2016, for example, Bangladesh Bank expects banks to allocate 5% of their loans to green projects, such as the construction of effluent treatment plants to convert wastewater into an effluent that can be either returned to the water cycle or reused. The directive forms part of a series of green initiatives mainly tied into the manufacturing and export sectors, which given their importance to the economy, is piquing the interest of some international banks.
HSBC is the only international bank with branches in all eight of the country’s export processing zones. In the last decade, some 9% of Bangladesh’s total annual exports have been channelled through HSBC, according to the British bank.
But other international banks are now looking to muscle in on more of the business, including Standard Chartered, which has branches in three export processing zones.
Online payment systems
Bangladesh Bank is also focused on centralising and modernising the country’s payment systems and is working on a real time gross settlement system, which is due to be implemented by October.
So far, the central bank has implemented a cheque truncation system and an inter-bank electronic fund transfer system in the local taka currency called National Payment Switch Bangladesh. Launched in December 2012, NPSB is effectively a motherboard for all electronic payments in the country — it facilitates interbank electronic payments originating from different channels, such as ATMs, point of sales, internet and mobile devices.
To date there are 42 banks routed through NPSB, according to the central bank’s website, and activity is increasing, with total transactions rising 24.3% from March to April.
According to HSBC’s de Maricourt, the government estimates that improving the payment systems will boost the country’s total GDP by 1% over the next 30 years.
Microfinance is another area high on Bangladeshi bank and regulator agendas — having earned Muhammad Yunus, founder of Grameen Bank, a Nobel peace prize back in 2006.
Although HSBC and other banks such as City Bank do not provide microcredit directly it does offer loans to small microfinance institutions that in turn offer micro loans to individuals.
While not faultless, supporting microfinance nurtures a blooming entrepreneurial spirit in the country that can only help Bangladesh going forward.