Development economics is not just about academic theory, and Dr. Atiur Rahman, Bangladesh’s central bank governor, is proof that it is possible to put theory into practice. With an established reputation as a pro-poor economist – with a Ph.D. thesis on ‘peasants and classes’ – the former university professor is now practicing what he has been preaching, and previously teaching, at the University of Dhaka.
On taking the helm of Bangladesh Bank in May 2009, Dr. Rahman sought to translate his research into transforming the central bank’s approach. “In our five-year vision, our strategy was that we must focus on financial inclusion – that became my major agenda,” he says.
Dr. Rahman’s appointment came as the effects of the global financial crisis were taking hold. “The international external demand for Bangladesh’s products was sluggish so we looked instead to focus on higher domestic demand,” he says.
In his role he has been focusing on areas such as green banking, socially responsible financing and mobile payments. On the question of whether a central bank governor should extend his mandate in this way -
rather than focusing on price stability and financial matters –Dr. Rahman says: “We did all of these [things] not at the cost of the main job of macro-prudential policy and financial stability – they are our mainstay, they remain our main course. The others are the salad and the dessert – together they are a good dinner.”
And the salad and dessert is now being eaten by those outside the central bank. “We have succeeded in making socially responsible and environmentally responsible financing mainstream – it is now in the mainstream of the financial sector,” says Dr. Rahman. And with the main course, his efforts have paid off. “The financial stability has been unprecedented. We have more than 6% growth, inflation is down, we have a current account surplus, a stable foreign exchange rate and access to finance is widespread,” he adds. “We did not expect to achieve such good results in such a short time.”
FOOD FOR THOUGHT
Food inflation is something Dr. Rahman keeps a close eye on. “Food imports can become a difficult proposition. In 2008, food inflation was high – it was 16% [but we] brought it down to 8%,” he says. And to move the country away from relying on food imports, the central bank has implemented a policy where banks have to lend a minimum of 2.5% of their loans to Bangladesh’s farmers. Dr. Rahman says that even the foreign banks operating in Bangladesh have to meet the minimum requirement of agricultural lending. “If they do not have branches they can give loans through microfinance institutions. If they fail to do it, I take away the targeted amount and put it in the reserves at a lower rate of interest. All banks have to do this, not just the public banks. It is good business for them as well,” he says.
In addition to encouraging lending to the agriculture sector, the central bank has brought unbanked farmers into the banking system by introducing bank accounts that can be opened with as little as 10 taka
($0.12). The central bank has also been focusing upon encouraging the flow of credit to the country’s small and medium-sized enterprises (SMEs). On the question of whether the governor is focusing on providing credit to SMEs instead of encouraging consumer credit, he says: “When demand exceeds supply then the supply should take priority – it is not about suppressing demand.” Dr. Rahman explains that he suppressed bank credit being used for luxury items as his focus is to stimulate industries that-are more productive and have social value. One bank executive explains that this principle means that banks are prioritizing, for example, the financing of a bus over a luxury car because the former is more beneficial to society as a whole. Dr. Rahman says that in the case of luxury cars – which were financed 80% by a bank and 20% with the consumer’s own money- that ratio has now been reversed so that consumption is limited to the level of disposable income. Also, he notes that if bank money is not used for companies in the luxury goods industry, it frees up credit for SMEs and consumers. “It is a balancing act. It’s not that we are against consumer credit,” he says.
This interview was published in the Banker, November 2013 (London, UK)