Circular Financing in Bangladesh: Are Policies Holding Back Progress?

Globally, the concept of circularity, guided by the 3Rs—Reduce, Reuse, and Recycle—is reshaping how we think about waste and sustainability. Circular financing plays a key role in this shift, providing the funds to help businesses embrace circular practices and reinvent their operations. This type of financing is not only essential for fostering innovation and sustainability, but also for ensuring that these practices can be scaled and integrated into mainstream economic activities. 

However, to truly accelerate circular financing, comprehensive policy reforms are needed. By implementing strategic policies, governments can create a favorable investment climate, mitigate financial risks for businesses, and ensure that circular economy initiatives receive the support they need to thrive.

Regulatory & Policy Framework for Circular Finance

In Bangladesh, financing for the circular economy falls under the broader category of Sustainable Finance. According to Bangladesh Bank, sustainable finance means providing financial services that consider environmental, social, and governance (ESG) factors to support businesses and benefit society as a whole. Green finance is a smaller piece of this puzzle, focusing specifically on funding projects that help reduce environmental damage. This includes funding for green technologies, activities, products that meet any of the 6 environmental objectives mentioned in the EU Taxonomy Regulation: 

1) Climate change mitigation

2) Climate change adaptation

3) Sustainable protection of water and marine resources

4) Transition to a circular economy, waste prevention and recycling

5) Pollution prevention and control

6) Protection and restoration of biodiversity and healthy ecosystems

There are several green finance avenues, such as the Refinance Scheme for Green Finance, Green Transformation Fund (GTF), Technology Development Fund (TDF), Green Climate Fund, and many other international funds available to support the green revolution in our industry. Some of the sectors prioritized in the green finance landscape include RMG, renewable energy, green infrastructure, energy and resource efficiency, liquid and solid waste management, recycling, environmentally friendly brick production, green agriculture, and green CMSMEs (Cottage, Micro, Small, and Medium Enterprises).

However, most of these funds are primarily targeted at large corporations. Ironically, it is SMEs that often require green funding the most. This is because their facilities tend to be inefficient, employ outdated, carbon-intensive technologies, and are more likely to contribute to pollution and other environmental concerns.

1. Sustainable Finance Policy (2016): All banks and financial institutions must establish a Sustainable Finance Unit and a Sustainable Finance Committee, aimed at integrating environmental considerations into their operations and investment decisions. All the banks and FIs must ensure the establishment and activeness of Effluent Treatment Plant (ETP) during financing to all possible clients. The policy relates specifically to the following:

• Banks and FIs should have targeted initiatives to scale up finance for CMSMEs, with a focus on specific sustainable/inclusive sectors.
• As per BB, disbursement target is min 5% for Green Finance of total term loan excluding staff loan and min 20% of total loan target for sustainable finance excluding staff loan.
• Green Industry established or being established under the green building rating system certified by appropriate authority (In Bangladesh – SREDA, Internationally – USGBC, LEED, BREEAM etc.) will be considered under Sustainable linked finance.

2.   Guidelines on Environmental and Social Risk Management (ESRM) (2017 and 2022): Bangladesh Bank issued updated Environmental and Social Risk Management (ESRM) Guidelines for banks and financial institutions in 2017. These updated guidelines include social issues and measurement tools, including an Environmental and Social Risk Assessment Tool. The 2022 update includes a comprehensive list of product/initiatives of Green Finance for banks and FIs.  

3. Refinance Scheme for Green Products, Initiatives, and Projects: Bangladesh Bank has introduced a revolving fund of BDT 4 Bn for 94 green products with an aspiration of building a sustainable future for the country. The Central Bank will charge commercial banks an interest rate of 1% on loans issued under this scheme, with the possibility of adjusting this rate periodically. Banks will use the 1% as a base rate when setting interest rates for clients and can add a maximum margin of 4% to this base rate.

4. Green Transformation Fund (GTF): The scheme allows all export-oriented industries to import machinery belonging to (i) Water use efficiency in wet processing (ii) Water conservation and management (iii) Waste management (iv) Resource efficiency and recycling (v) Renewable energy and Energy efficiency (vi) Heat and temperature management and (vii) Air ventilation and circulation efficiency category.  The tenure of the loan will be 5- 10 years with a one-year grace period.

5. SME Refinance Scheme: In 2023, BB doubled the size of the refinance scheme for SMEs to BDT 30 Bn. Men will be subject to an interest rate of 7%, while women will benefit from a reduced interest rate of only 5%. Additionally, banks can access funds from the central bank at rates of 0.5% for women and 3% for men.

The Circular Financing Value Chain

Demand Side

Businesses and corporations implement circular economy practices and apply for financing to support sustainable projects, while small and medium enterprises (SMEs) engage in innovative circular economy practices and seek funding to scale their operations. Local communities participate in and benefit from circular economy projects, especially in rural and underserved areas. Consumers drive demand for sustainably produced goods and services.

Facilitators

The Bangladesh Bank (BB) sets guidelines and policies for sustainable and green financing, ensuring regulatory compliance, and the Ministry of Finance develops and implements fiscal policies that support circular financing. Environmental regulatory agencies oversee environmental compliance and promote sustainable practices, while industry associations advocate for the industry-wide adoption of circular economy principles and support members in accessing financing. Legal advisors ensure all legal aspects of the financing agreement are clear and complied with.

Supply Side

Commercial banks provide loans and financing for circular economy projects, and development banks offer funding and technical support for large-scale sustainable projects. Impact investors provide funding for projects that deliver both financial returns and positive environmental impact, while venture capitalists invest in startups and innovative companies focusing on circular economy solutions. Green bonds and sustainable investment funds offer alternative financing mechanisms for large-scale circular economy projects. Multilateral development banks (e.g., World Bank, ADB) offer financing and capacity-building support for sustainable projects, and bilateral donors provide grants and funding for specific circular economy programs.

Technical Assistance Providers

Independent auditors conduct pre-approval assessments, ensuring the project’s feasibility and alignment with circular economy principles. Third-party evaluators perform mid-term evaluations to assess the project’s progress and compliance with financing conditions, while impact assessment specialists carry out impact assessments to evaluate the long-term benefits and sustainability of the project. Environmental consultants provide expertise in assessing the environmental impact of the project and ensuring compliance with regulatory standards. United Nations agencies (e.g., UNDP, UNEP) provide technical assistance, funding, and policy support for circular economy initiatives.

Awareness and Capacity Builders

Non-governmental organizations (NGOs) advocate for sustainable practices and provide support for community-based circular economy projects. Universities and research institutes conduct research on circular economy practices and develop innovative solutions. Industry associations advocate for the industry-wide adoption of circular economy principles and support members in accessing financing. Multilateral development banks (e.g., World Bank, ADB) offer capacity-building support for sustainable projects.

Challenges in the uptake of green finance

In Bangladesh, green projects face hurdles due to their perceived risk and inadequate profitable track record, deterring investors and banks. Such projects typically have longer payback periods, creating a maturity gap from lenders’ perspective. Specifically, MSMEs necessitate tailored green finance assistance, potentially encountering challenges associated with inadequate collateral or historical instances of non-performing loans. While large corporations can afford to finance the circular transition through their retained earnings or other internal sources, SMEs are often dependent on external financing to adopt circularity. 

As per Sustainable Development Goals (SDGs) and Nationally Determined Contributions (NDCs), the finance of such enterprises has to be a sustainable one with its lion’s share being green finance. However, until 2022, only 5.1% of Green Finance was allocated to Green CMSMEs. In addition, most of the green funds in Bangladesh are only for purchasing machines or tangible assets while SMEs might require other support as well. Overall, the barriers to accessing finance include stiff lending policies with high collateral security requirements, small project ticket sizes, and high transaction costs. 

Next, there is quite a deficit in the technical expertise required to evaluate and manage green financing projects. Financial institutions often lack the necessary skilled personnel to assess environmental impacts and the viability of green projects effectively. Besides, the supporting infrastructure, such as renewable energy installations or waste management systems, is underdeveloped. Coupled with a market that is not fully ready to transition to greener alternatives due to cost concerns or lack of availability, this creates a significant barrier to the uptake of green finance.

The foremost obstacle in advancing circular finance is the issue of greenwashing. For instance, green bonds may be issued with the stated purpose of funding environmentally beneficial products, yet some of the proceeds might end up financing projects that do not meet environmental standards. In other words, there needs to be a robust mechanism in place to monitor the actual environmental impact of financed projects. 

Innovative circular finance instruments around the world

The financial sector can capitalize on the circular economy opportunity by leveraging or adapting existing products and services. Currently, developing countries represent only $1.6 Bn of the estimated $33 Bn in outstanding green loans. However, this segment of the market is expected to surpass the growth rate of the green bond market in the short term.

• Green loan & green bond: Green loans are used by borrowers to finance environmentally beneficial projects with shorter tenures, often directly from banks. Green bonds, however, are debt securities issued to raise funds for sustainable projects on a larger scale, with longer terms, and can be traded on markets or privately placed.

Currently, Bangladesh’s bond market is dominated by government bonds, with corporate debt relatively underdeveloped. But Pran Agro Limited (PAL) issued their first green bond with a face value of BDT1.5 billion to finance their agro-recycling, organic farming alongside environmental improvements in its manufacturing operations.

• Green Sukuk: A sukuk is an Islamic bond that can appeal to environmentally conscious investors as well as those adhering to Sharia principles. Under this mechanism, the issuer (i.e., borrower) sells certificates to investors. The issuer uses the proceeds from the certificates to purchase the asset, and investors receive partial ownership of the asset. The investors are also entitled to part of the profits generated by the asset as return of investment. Earlier in 2021, Beximco floated a BDT 3,000 crore Sukuk bond – the first-ever asset-backed securities by a private sector entity in Bangladesh – to finance its two solar power plants and for expansion of its textile division.
• The issuance of Sukuk bonds can create opportunities for investors from Islamic countries to look into Bangladesh as another potential investment destination. Sustainability linked bonds: A sustainability linked bond (SLB) is a borrowing instrument where financial and structural characteristics are based on whether the issuer meets predetermined key performance indicators (KPIs) related to ESG within a given timeframe. If the company doesn’t meet those goals, there’s usually a penalty: higher interest paid to the lender. In 2020, HSBC Bangladesh arranged the first sustainability-linked loan in Bangladesh as it lent $118 million  to Square Group to advance its renewable energy ambitions.

• Blended Finance: 

Case study 1: Intesa Sanpaolo – a top banking group in Europe – has long been committed to circular economy (CE), as manifested by its distinctive partnership with the Ellen MacArthur foundation. Together, they have identified criteria for assessing the level of circularity of the initiatives proposed by companies. 

• Solutions that extend the product life cycle (application of modular design; reverse logistics programmes; reuse, repair and regeneration of products)
• Design and/or manufacture of products that can be fully recycled or composted within an efficient framework of collection, separation and recycling
• Innovative technologies that enable circular business models (Internet of Things to empower traceability services, reverse-logistics and/or predictive maintenance; 3D printing to increase the easy-to-repair degree; Artificial Intelligence, marketplaces development for secondary raw materials).

With a view to supporting businesses active in circular transition, the group  allocated 8 Bn Euro as part of their 2022-2025 Business Plan. They offer five distinct products tailored for SMEs, covering areas such as ESG, Climate Change, and Agribusiness. In 2023, the group  introduced a product specifically for businesses opting to invest in renewable energies. This loan features a subsidized rate and offers an extra incentive if the business directs a portion of the energy generated, which isn’t self-consumed, to the Renewable Energy and Communities (CER).

Case study 2: India has adopted a sector-specific financial institution (FI) strategy to meet its net zero commitment by 2070. For instance, REC Limited and Power Finance Corporation (PFC) leverage their deep understanding of the Indian power sector to develop innovative financial products tailored to the specific needs of transition projects. REC has successfully raised USD 450 Mn from international markets through green bonds. These funds are directed towards financing solar, wind, and meeting renewable purchase obligations. Furthermore, these FIs contribute to the implementation of green initiatives by offering technical assistance and training to project developers.

Key Enablers of a Circular Economy

The World Business Council for Sustainable Development identifies 4 key policy enablers after an in-depth review of the circular economy policies. By identifying these key enablers, policymakers and businesses can better understand how and why these enablers are effective in expanding circular economy implementation. 

Policy Recommendations for Promoting Circular Financing

The Gaps

Both the Bangladesh Sustainable Finance and Bangladesh Green Refinance policies specify particular technologies and products, deviating from a more comprehensive taxonomy. This targeted approach may pose challenges in financing cutting-edge technologies like energy storage or emerging renewable sources such as geothermal or tidal energy. 

Notably, Bangladesh’s policies lack explicit references to substantial impact measurements on emissions, a stark contrast to the MDB Taxonomy’s stringent criteria. In addition, while green finance definitions are similar in sectors like renewable energy and eco-friendly buildings, they vary for sectors such as nuclear power, noise reduction, and carbon capture, which depend on the country-specific context. 

MSMEs play a crucial role in the domestic economy, serving as vital backward linkage players for larger industries. Sectors such as light engineering, shipbuilding, and footwear are prime examples. To fully close the loop, these enterprises need to be integrated within the circular ecosystem, which necessitates both technical and financial support. 

Current financial policies backing up MSMEs include a credit guarantee scheme facility, a loan facility at a maximum of 7% for male entrepreneurs, a loan facility at a maximum of 5% for women entrepreneurs, among others. In 2004, the Central Bank introduced a refinancing scheme named the “Small Enterprise Refinance Scheme” which started off with 1 Bn and currently stands at BDT 30 Bn. While 100% of refinancing is provided against disbursement of both working capital and term loans under this scheme, there is no particular green finance fund in place for SMEs. 

The Recommendations

• Streamlining Financial Access for CMSME Entrepreneurs: Banks and Financial Institutions (FIs) need to implement a process-friendly documentation checklist to attract and encourage CMSME entrepreneurs with bankable projects. It is essential for banks and FIs to assign specialized personnel to educate and assist CMSME clients, enabling them to access diverse financing and technical facilities under Bangladesh Bank’s low-cost funding arrangements. Barriers like collateral and personal guarantees should not impede access to finance.

• Centralized Database for CMSMEs: Establishing a centralized database for all CMSMEs, which includes essential information such as their credit history, would be beneficial. Entities like the SME Foundation, SME and Special Programs Department of Bangladesh Bank, or other capable organizations could lead this initiative. Such a database would help financial institutions effectively evaluate the creditworthiness of CMSMEs.

• Capacity Development Financing: Government and donor funding for capacity development is crucial for enabling businesses, particularly SMEs, to transition to a circular economy. The “Strategic Goal 10” outlined in the SME Policy 2019 by the Ministry of Industries has recognized the need for capacity development for establishing environmentally friendly SME industries, and utilizing them to contribute to industrial waste management efforts. This financing supports training and education to equip workers with necessary skills, organizes workshops and seminars to share best practices, and provides advisory services for implementing circular models. It also facilitates the development and dissemination of industry standards, supports accreditation and certification programs, and establishes collaborative platforms for knowledge sharing. Additionally, this financing aids businesses in complying with regulatory requirements, developing standardized reporting frameworks, and implementing effective monitoring and evaluation systems to ensure transparency and accountability. Enabling the demand side with the necessary skills and resources makes lending to these corporations more lucrative from a financier’s perspective, instilling more confidence regarding the return on investment. This is a precursor to accelerating circular financing, especially from international and private investments. 

• Facilitating Foreign Investments: Circular economy (CE) financing is gaining significant momentum in regions such as the EU and the Americas. Financiers in these areas are increasingly familiar with circularity and are more likely to explore diversified investment opportunities. To enhance financing for domestic corporations, it is crucial to create an improved foreign investment climate that attracts and supports these investments.

• Public Procurement of Circular Products: The government can leverage its public procurement expenditure to purchase circular products from corporations, thereby mitigating the risks associated with the supplier’s investment in circular practices. This strategy creates a stable market for circular products, encouraging more companies to participate. By integrating extended producer responsibility, the government ensures that micro, small, and medium enterprises (MSMEs), which often serve as suppliers or subcontractors to larger corporations, also adopt circularity within their operations.

Regulators and financial institutions need to adopt a different approach toward financing circular initiatives. Traditional evaluation criteria such as financial return, risk, and profitability might not be sufficient. To accelerate circular financing, the evaluation of projects must incorporate the environmental and social impacts they generate. This approach incentivizes circular initiatives, encouraging enterprises to adopt more sustainable practices. Capacity development is crucial for both financial institutions and enterprises to successfully transition to a circular economy.

Financial institutions need training on assessing the long-term value and sustainability of circular projects, which involves understanding new business models and evaluating non-financial metrics. Enterprises, on the other hand, require education on circular economy principles, access to innovative technologies, and guidance on integrating sustainable practices into their operations. Enhanced capacity in these areas will enable financial institutions to make more informed lending decisions and help enterprises adopt practices that align with circular economy goals, ultimately fostering a more sustainable economic landscape.