Corporate Social Responsibility Practices in the ...

Bank Parikrama Volume XXXVIII, Nos. 3 & 4, September & December 2013 (pp. 129 - 152)

Corporate Social Responsibility Practices in the Banking Sector in Bangladesh - An Assessment - Md. Shahid Ullah

Abstract Corporate Social Responsibility (CSR), in recent times, has become an integral part of business. The contribution of banks in this regard is of paramount importance considering their unique position in the economy. CSR practices by banks not only improve their own standards but also affect the socially responsible behaviors of other businesses. The paper aims at assessing the nature and magnitude of CSR initiatives and practices by the banks in Bangladesh, and examining the linkage between CSR and some key performance indicators of banks. Out of forty seven scheduled banks in Bangladesh, forty six have involvement with CSR activities in 2010 and the involvement of banks in terms of CSR expenditure, community investment, financial inclusion, CSR governance, CSR reporting, and environmental safety has considerably increased during 2007-2010. The study finds no statistically significant relationship between CSR expenditure and total revenue, net income after tax, number of branches, and deposit growth. Keywords: CSR, Bank, CSR Governance, CSR Expenditure, CSR Reporting, Financial Inclusion, Environmental Practice JEL Classification: G34, L20, M14

1.

Introduction

Corporate Social Responsibility (CSR) has become a standard of sustainable business practices (Rahman 2009). The contribution of financial institutions including banks in this regard is of paramount importance considering their vital role in financing the economic and developmental activities. CSR ensures trade off between economic and social goals to encourage the efficient use of resources. CSR is not just charity and compliance issue rather it is an attempt to respond to all the stakeholders’ expectations more efficiently and in a responsible manner (Habib et al. 2007). So, the CSR initiatives of banks in the society, especially in a developing country like ours, need to be duly emphasized. 

The author is Assistant Professor, Bangladesh Institute of Bank Management (BIBM), Dhaka. Views expressed in this article are the author’s own. Accepted for publication in April, 2012.

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CSR is widely accepted as a strategically important issue for the sustainable growth and competitiveness of business now-a-days. CSR practices by banks not only improve their own standards but also affect the socially responsible behaviors of other businesses (Habib et al. 2007). The advantages of CSR for companies, including increased profits, customer loyalty, trust, positive brand image and combating negative publicity, are evidenced (Brown and Dacin 1997; Sen and Bhattacharya 2001). Banking industry itself can also be benefited from the positive effects on the society as a whole, particularly on its clients. Moreover, banks that mainly do businesses with the depositors’ money cannot avoid responsibility to the society. It is well known that governments in different countries intervened to save banks using taxpayers’ money in response to 2008-09 bank failure during the global financial crisis. As the common people have to take care of banks in their bad days, banks must be ready to take care of the society as well (Habib 2010). There are various incentives and regulatory bindings in developed countries to promote socially responsible behavior of business and a good number of financial institutions are showing positive response towards the society through philanthropy, employee empowerment, equitable social practice, safeguarding environment and doing social and environmental reporting. Some banks of United States and European Union are among the pioneers in protecting the interest of stakeholders. In the developing and least developed countries, banks may play crucial roles in saving the environment, promoting human rights within the work place, and providing welfare through their financing policies. However, the status of CSR has not been satisfactory in many developing and least developed countries, largely due to lack of awareness, poor enforcement of existing laws and inadequate pressure from civil society and interest groups (Habib 2010). In Bangladesh, most of the business houses, particularly banks are not aware of the benefits of CSR. They have not integrated CSR in their routine operations; rather they considered it as a matter of occasional charity or promotional activities (Rahman 2009). Against the above backdrop this study aims at reviewing the CSR initiatives and practices in the banking sector of Bangladesh. The specific objectives of the paper are: One, to review theoretical aspects of the business relevance of CSR; Two, to identify and analyze CSR practices in global banking industry; Three, to review the policy, regulatory and business

Ullah: Corporate Social Responsibility Practices in the Banking Sector

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environment for the development of CSR in the banking sector of Bangladesh; Four, to assess the current status of CSR practices of banks in Bangladesh, and to examine the business relevance of CSR practices of banks in Bangladesh. Data and Methodology This is a qualitative study and findings are based on examinations of published reports, consultation with bankers, and discussions with academicians and experts. Published literature, research papers, annual reports, and websites of different banks, environmental NGOs, and sustainable development organizations were reviewed to form theoretical foundation and backdrop of the paper. The study covers all the forty seven commercial banks1 operating in Bangladesh and uses data for the period ranging from 2007 to 2010. The findings of the study have been summarized using descriptive statistics. To examine the relationship between CSR expenditure and some other variables namely total revenues, net income after tax, number of branches, and deposit growth for the period of 2008-2010, the study has used Pearson’s correlation coefficient. After stating the background, objectives and methodology of the study in Section-1, Section-2 attempts to review conceptual aspects of CSR and its business relevance in the banking sector. Global CSR guidelines and CSR practices in the banking industry in global economies are discussed in Section-3. Section-4 is about policy and regulatory environment for the development of CSR in the banking sector in Bangladesh. The current status and business relevance of CSR Practices for the Banking Sector of Bangladesh are discussed in Section-5. Section-6 concludes the paper 2.

Business Relevance of CSR in the Banking Sector: Aspects

Conceptual

CSR considers society, nature and ethics as a central part of strategy that can improve the competitive position of a company (Mittal et al. 2008). CSR takes care of the interest of all stakeholders rather than those of the stockholders only. By incurring CSR expenditures, a firm can strengthen its competitiveness, counter the risk of losing the existing market shares and establish its presence in emerging ones (Jones 1996). Instead of thinking CSR as a regulatory or discretionary cost, business executives across the globe are 1

The number of banks was 47 during the time of conducting research.

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starting to see it as an investment that brings long-term benefits for the company (Frederick 1983). The impacts of CSR are pervasive; it significantly improves business house reputation and confidence of customers and business partners, and motivates the employees to work for a company they could be proud of. CSR is good for all. Studies show that what is good for the environment, workers, and the community is also good for the financial performance of the business. The benefits of practicing CSR include: improved financial performance, reduced risk exposure, identification of new products and new markets, enhanced brand image, increased customer loyalty, improved recruitment and retention performance, creation of new business networks, motivated employees, improved trust, community development, enhanced corporate reputations, improved government relations, tax waiver on socially and environmentally responsible business lines, reduced regulatory intervention, reduced costs through environmental best practice leading to more sustainable profitability (Hoque 2008; Rahman 2011). Researchers note that business managers charged with implementing CSR in their firms filter such initiatives through an economic lens. Cannon (1992) quotes Lord Sieff, (former chairman of Marks & Spencer plc) as follows: “Business only contributes fully to a society if it is efficient, profitable and socially responsible”. So businesses need to be engaged in CSR activities in their own interest. The financial services sector plays a critical role in promoting sustainable development through its financial intermediation. By generating, allocating and pricing financial resources banks may greatly influence business practices. Project financing by banks should focus on CSR practices of the borrower. Habib et al. (2007) notes that CSR practices by banks should also ensure that they actively promote sustainable development through positive support to social and environmental developments, e.g. by offering incentives those favor better social or environmental practices. Such incentives might be, for example, providing credits at lower interest rates for companies with a proven social and environmental record. CSR programs of the banking sector of Bangladesh can mitigate inequality of income distribution and market failures through financial inclusion. In a developing country like ours with scarce resources, it is important to ensure efficient allocation of our resources. Besides fulfilling the ethical obligations, the banks can be considerably benefited from the new client bases created as a result of CSR activities (BB 2010).


3.

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Global CSR Guidelines and CSR Practices in the Banking Industry of Global Economies

In response to the acute pressures from the stakeholders across the globe to carry out business in a responsible and ethical manner (Bhattacharya et al. 2004; Jeucken 2001) the banking industry, international development organizations, environmental Non-Government Organizations (NGOs), etc. have been undertaking several initiatives and promulgating various guidelines to promote CSR. Some of the widely followed guidelines include the United Nations Global Compact, the United Nations Environment Programme Finance Initiative, position paper released by the World Business Council on Sustainable Development (WBCSD), EPI-Finance, the Equator Principles, the Collevecchio Declaration, the Global Reporting Initiative (GRI), etc. These guidelines are generally voluntary in nature for the financial institutions, and only apply to those in the industry that sign up for such initiatives. The UN Global Compact is a CSR initiative applicable to all business sectors consists of 10 voluntary principles on human rights, labor rights, environment and anti-corruption. The compact is currently the largest initiative of its kind in the world; it has close to 8000 participants, including over 6000 businesses in 135 countries around the world. It includes recommendation to all sorts of financial market participants, ranging from stock exchanges, pension funds, financial institutions and regulators (UNGC 2009). The Global Reporting Initiative (GRI) produces one of the world's most prevalent standards for sustainability reporting2 - also known as corporate social responsibility reporting, triple bottom line reporting, environmental social governance reporting. GRI seeks to make sustainability reporting by all organizations as routine as, and comparable to financial reporting. GRI guidelines apply to corporate businesses, public agencies, smaller enterprises, NGOs, industry groups and others. As of January 2009, more than 1,500 organizations from 60 countries use the Guidelines to produce their sustainability reports (GRI 2000-2011).

2

Sustainability reporting is a form of value reporting where an organization publicly communicates its economic, environmental, and social performance.

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Similarly, United Nations Environment Programme Finance Initiative (UNEPFI 2007) launched at the beginning of 1990s to work with financial companies to identify, define and promote good and best environmental practices in their internal and external operations. In collaboration with over 260 commercial and investment banks, fund managers, and insurance companies, the initiative is based on a statement of commitment in regard to environmental and sustainable development in three areas of their activities: incorporating environmental and social aspects in internal operations; identifying and quantifying environmental risk as a part of risk management, and developing products and services that actively promote environmental protection. In response to the demand of a group of financial institutions, the World Business Council on Sustainable Development (WBCSD) released a position paper on the impact of sustainable development in the financial industry, and the criteria on which a sustainability strategy for the financial industry should be based in 2002. It emphasized on integration of Sustainable Development (SD), major issues of SD, influence and responsibility of financial companies as drivers for change towards SD, and transparency of financial institutions in their financial reporting (WBCSD 2006). Another initiative, (EPI-Finance 2000), aims at developing environmental measurement indicators, and was launched by 11 financial corporations in Germany and Switzerland. The set of Environmental Performance Indicators (EPI) for the financial industry incorporated the environmental evaluation standard IS0-14031 as a guideline. The EPI-Finance 2000 proposed indicators covering four categories of financial services-commercial banking: Investment Banking, Project Financing, Asset Management and Insurance relating to integrating environmental issues into core business and development of environmental products for financing (EPI-Finance 2000). Other important CSR guidelines-the Equator Principles are based on the environmental and social policies and guidelines of the International Finance Corporation (IFC), the private sector development arm of the World Bank Group. The Equator Principles are a set of voluntary commitments in the area of project financing, designed by a group of banks for assessing, managing and monitoring environmental and social risk. These principles apply to all projects financing, in all sectors globally, where the size of the deal exceeds US$50


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million. Each project is categorized into one of three groups: High-impact `Category A' projects, which require a full Environmental Impact Assessment (EIA); `Category B' projects with lower likely impacts, which require a less-extensive EIA; and `Category C' projects with minimal or no adverse impacts. The projects under category C do not require an EIA. The principles also require borrowers in high impact projects to carry out appropriate local stakeholder consultation. In addition, the borrower or a third-party expert must put an environmental management programme in place to address project compliance, mitigation, action plans and monitoring procedures. The Collevecchio Declaration on "Financial Institutions and Sustainability" was released in January 2003, which was endorsed by over 200 civil society organizations, states six key guiding principles that NGOs are calling on for banks and other financial firms to adopt at all levels of their activities and transactions. These guiding principles include commitment to sustainability, commitment to `Do No Harm’, commitment to responsibility, commitment to accountability, commitment to transparency, and commitment to sustainable markets and governance (Banktrack 2003). The environmental guidelines are strictly followed in some developed countries and heavy penalties were imposed on banks for violating socio-economic principles. For instance, US Comprehensive Environmental Response Compensation and Liability Act (CERCLA) in late 1980s resulted in huge loss to the banks in the US for the environmental pollution of their clients and made them to pay the remediation cost. Furthermore, socially irresponsible lending banks have to face a lot of criticism for their actions in many times. Jeucken (2004) illustrated that “ABN AMRO attracted massive public criticism for its engagement in destructive mining practices in West Papua New Guinea”. Hoare (2004) reported, “The criticism of the finance institutions of BP and Barclays for the Baku-Tbilisi-Ceyhan oil pipeline project which was ultimately responsible for cutting across nationally protected wetland area and causing displacements of local population in Azerbaijan, Georgia and Turkey”. The rapid growth of Information Technology (IT) caused increased demand for adoption of CSR activities in banking sector. Regulatory bodies, media, NGOs, customers have significantly addressed social responsibility issues in the banking sector (Jeucken 2001; Bhattacharya et al. 2004). Likewise, international organizations such as the World Bank also frequently

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exerts pressures on banks to analyze social and environmental risk involved in projects to be financed. In addition to this, CSR practices of an organization have significant impact on its reputation and resultant profitability. Around the globe, banking industry is showing a good commitment to CSR principles. Banks have showed significant efforts to comply with the relevant provisions to avoid the regulatory action through depicting a good corporate citizenship (Decker 2004). 4.

Policy and Regulatory Environment for the Development of CSR in the Banking Sector of Bangladesh

There were no explicit policies on CSR in Bangladesh prior to 2008. In 2008, Bangladesh Bank took initiatives for formalizing CSR in the banking sector of Bangladesh and issued an elaborate directive titled ‘Mainstreaming Corporate Social Responsibility (CSR) in banks and financial institutions in Bangladesh’3. The directive states the strategic objective for CSR engagement, priority areas to promote CSR in client businesses, and first-ever CSR program indicating some likely action plans. The priority areas as indicated by BB in the field of CSR include self-employment and SME credits designed to create productive new on-farm/off-farm employment; financing of biomass processing plants, solar panels, waste recycling plants, Effluent Treatment Plants (ETP); credit programs for diversified production of crops, oilseeds, spices, vegetables, fruits etc.; mobile phone based/MFI supported programs for prompt delivery of remittances; card based/ mobile phone based delivery of financial services; financing programs to promote domestic tourism and markets in cultural products/events. Besides adoption of socially and environmentally responsible practices in own internal operations, banks and financial institutions can make major CSR contribution by speeding up financial inclusion of the large socially disadvantaged rural and urban population segments; drawing them in with appropriate financial service packages and with financing programs innovatively designed to generate new employment, output and income.

3

DOS Circular No. 01 ‘Mainstreaming Corporate Social Responsibility (CSR) in banks and financial institutions in Bangladesh’ dated 1 June 2008.


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In a recent circular, Bangladesh Bank also provides a sense of direction to the CSR agenda of the banking sector by suggesting that, those banks will be considered as more compliant of CSR who are taking measures for rehabilitating agriculture, fisheries, livestock, and protecting environment, besides providing relief to the people affected in natural calamities like 'Sidr' and 'Aila'4. Bangladesh Bank has been monitoring CSR adoption and CSR performance of banks and financial institutions as an additional dimension of their management performance and asked commercial banks to submit a halfyearly statement of CSR initiatives as per enclosed format (of the BB guideline issued on June 1, 2008). The statement should report on organization’s own internal operations, market environment, financial inclusion, social projects and community investment. The report should also provide a short description of sectors, amount of investment and expenditure and number of beneficiaries5. Bangladesh Bank has advised all the commercial banks to include the CSR programmes in their mainstream banking activities instead of short-term social works like providing grants, aids and donations. The BB circulars asked the banks to formulate their own CSR policy with the annual outlay for CSR programmes. Referring to the Global Reporting Initiatives (GRI), BB said that the CSR annual report should include the banks' performance in economic, environment and social sectors with special focus on both qualitative and quantitative operations. Bangladesh Bank has, of course, started guiding the banking sector to become more inclusive and environmentally responsive issuing different circulars like Agricultural Credit Policy6, Guidelines on Environmental Risk Management7, and Policy Guidelines for Green Banking8. As online banking has been the starting point of green banking in many instances, Bangladesh Bank has been encouraging commercial banks of the country to undertake online banking activities. Banks have been brought under 4

DOS Circular No. 01 ‘Mainstreaming Corporate Social Responsibility (CSR) in banks and financial institutions in Bangladesh’ dated 1 June 2008. 5 DOS Circular Letter No. 07 ‘Mainstreaming Corporate Social Responsibility (CSR) in banks in Bangladesh’ dated 15 July 2010. 6 ACD Circular No. 14 ‘Agricultural / Rural Credit Policy and Programme for the fiscal Year 2010-11’ dated July 21, 2010. 7 BRPD Circular No.01 ‘Guidelines on Environmental Risk Management(ERM)’ dated January 30, 2011. 8 BRPD Circular No.02 ‘Policy Guidelines for Green Banking’ dated February 27, 2011.

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the purview of e-commerce with a view to providing the customers with online-banking facilities covering payments of utility bills, money transfer and transactions in local currency through internet as well9. Considering the adverse effects of climate change, some recent initiatives of BB are really encouraging. Banks have been advised to be careful about the adverse impact of natural calamities and encourage the farmers to cultivate salinity resistant crops in the salty areas, water resistant crops in the water logged and flood prone areas, drought resistant crops in the drought prone areas, using surface water instead of underground water for irrigation and also using organic fertilizer, insecticides by natural means instead of using chemical fertilizer and pesticides10. BB has also been taking initiatives for the rehabilitation of cyclone and other natural disaster affected people of the country time to time. For example, BB issued a circular on Agri-loan facilities for rehabilitation of agriculture sector in cyclone Aila affected areas in July, 200911. Moreover, banks were asked to undertake CSR activities in the areas of the affected people for their rehabilitations12. The recent comprehensive circular13 of BB on ‘Policy Guidelines for Green Banking’ is a remarkable step on the way to develop green banking practices in the banking sector of Bangladesh. The circular requires commercial banks to adopt a comprehensive green banking policy by December, 2013. Besides introducing internal environment management, the banks are expected to introduce environment friendly financing to address the environmental challenges of the country. The policy is segregated into three phases. In phase-I, the banks are to develop green banking policies and show general commitment on environment through in-house performances by December 31, 2011. Banks are required to create a green banking unit; make a high-powered committee to review the banks' environmental policies, strategies and programs; allocate sufficient fund in their annual budget for green banking; and introduce a green office guide for practicing internal environment management. The banks should take measures to save electricity, water and paper consumption as per the requirement. Instead of relying on 9

BB Circular No-2, dated February 27, 2011. BB ACSPD Circular No-04, dated July 14, 2009. 11 BB ACSPD Circular No-05, July 14, 2009. 12 BB DOS Circular No-2, June 2, 2009. 13 BB BRPD Circular No-2, February 27, 2011. 10


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printed documents, online communication should be extensively used for office management. Banks are also to create a climate risk fund to finance the economic activities of the flood, cyclone and drought prone areas at the regular interest rate without charging additional risk premium. In phase-II that would not exceed December 31, 2012, banks have to formulate specific policies for different environmentally sensitive sectors14 and will have to determine a set of achievable targets and strategies, and disclose these in their annual reports and websites. They are expected to set up green branches and should increasingly rely on virtual meeting through video conferencing. Banks are to develop and follow environmental risk management manual in their assessment and monitoring of project and working capital loans under phase-II. Phase-III, which is to be attained by December 31, 2013, requires banks to publish independent Green Annual Report following internationally accepted format like GRI with the arrangement of external verification. The circular on policy guidelines for green banking requires reporting to BB on quarterly basis first of which was due on July 15, 2011. Considering the importance of education for alleviating poverty, minimizing inequality and developing the life standard of under-privileged people of Bangladesh BB asked all scheduled banks operating in Bangladesh to provide scholarships at different levels ranging from secondary school to PhD in addition to interest free study loan to meritorious students including issues of the freedom fighters. 15 BB also advised all scheduled banks to establish a separate ‘CSR desk’ in their bank as a contact point for the purpose of furnishing up-to-date information to it on CSR initiatives/activities as well as maintaining proper communication and liaison with all concerned. 16 Incentives Offered by Bangladesh Bank and Government for Encouraging CSR Bangladesh Bank has been providing various incentives for encouraging CSR practices such as environment-friendly practices by both the banks and their counter parties, financial inclusion, use of renewable energy, philanthropic support to the people affected by natural calamities, maximum 14

Agriculture, agri-business, agro farming, leather, fisheries, textile, renewable energy, pulp and paper, sugar and distilleries, construction, engineering and basic metal, chemicals, rubber and plastics, hospitals, brick manufacturing, and ship-breaking. 15

DOS Circular No. 07 ‘Mainstreaming Corporate Social Responsibility (CSR) in banks in Bangladesh’ dated 15 August 2010. 16 DOS Circular Letter No. 16’ Establishing separate ‘CSR desk’ in banks ‘dated 20 December, 2010.

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utilization of limited farming land, promotion of cultures & sports, promotion of self-employment, and remittance etc. BB offers different refinance facilities at bank rate against loans for agriculture, Small and Medium Enterprises (SMEs), renewable energy and effluent treatment projects. BB offered Taka 200 crore refinance line in FY 10 against bank loans for investments in solar energy, biogas plants, Effluent Treatment Plant (ETP), and energy efficient kilns17. BB introduced another new refinance facility of Taka 500 crore to capacitate jute sector, the age-old green pillar of Bangladesh economy with an expectation that this sector would revive and act as a substitute of polythene through the state-owned commercial banks (Rahman 2010). BB also has refinance line supported by Asian Development Bank (ADB) for banks against their loans to SME. CSR practicing banks will enjoy some incentives in the form of preferential treatments for the compliant banks. BB will give points to compliant banks on management component while deciding on its CAMELS (Capital, Asset, Management, Earning, Liquidity and Sensitivity) rating; BB will name top ten banks for their overall performances in CSR; and BB will take into account CSR in giving permission to open new branches. All these incentives will initiate positive competition for more humane banking among banks. There are various incentives from the government of Bangladesh to stimulate CSR activities. Some of the incentives are: Business firms of the country are already enjoying 10% tax exemption on their actual CSR expenditure in 22 sectors; poor farmers in our country are now receiving tax exemption on income from deposit balance up to Taka 100,000 on their ‘10 Taka Farmer Account’; Besides, government provides 6% interest subsidy for banks against their concessional lending to pulse/spice growers, corn/ oil seed harvester, salt cultivators, etc. through BB. All these initiatives will hopefully create conducive environment and the banking sector of Bangladesh will come forward to do more CSR activities. 5.

The Current Status and Business Relevance of CSR Practices for the Banking Sector of Bangladesh

Due to practices in momentum. expenditure, 17

utmost care and surveillance of Bangladesh Bank, the CSR the banking sector of Bangladesh has been gaining huge The involvement of banks in terms of direct monetary community investment, financial inclusion, CSR governance,

BB ACSPD Circular No-9, July 08, 2010.


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CSR reporting and environmental safety has considerably increased during 2007-2010. Different aspects of CSR practice in the banking sector of Bangladesh are briefly presented below. CSR Expenditure of Banks

Out of forty seven scheduled banks in Bangladesh, forty six had some kind of engagement in CSR practices in 2010. In terms of direct monetary expenditure, engagements of banks in CSR initiatives are increasing, particularly following issuance of BB guidance18. The CSR expenditure of banks in Bangladesh sharply increased from Tk. 226.4 million in 2007 to Tk. 2329.80 million in 2010 registering 929 percent growth in CSR expenditure from 2007 to 2010 (Figure-1). However, CSR expenditures of banks were mainly in the form of passive grants and donations. CSR expenditures of banks can be broadly categorized as philanthropic expenditures19 and strategic philanthropic expenditures20. By practicing CSR, a bank can be benefited both directly and indirectly. The direct benefit that a bank can enjoy comes from strategic philanthropy. Figure 1: CSR Expenditure of Banks over 2007-2010 CSR Expenditures (Taka in milion) 2500

2329.8

2000 1500 CSR Expenditures

1000 500

410.7

553.8

226.4 0 2007

2008

2009

2010

Source: Bangladesh Bank (2011) 18

DOS Circular No 01 dated 1 June, 2008. Philanthropic activities are done for the well-being of the mankind, as by charitable aid or donations. It is "private initiatives for public good, focusing on quality of life (en.wikipedia.org/wiki/Philanthropy). 20 use of philanthropy as a means to simultaneously and directly benefit their business interests and those of a beneficiary organization (http://dowelldogood.net/?p=539). 19

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Table-1a shows that the total philanthropic expenditures incurred by all banks from 2007 to 2010 are Taka 2486.25 million and it has slightly decreased to Taka 201.20 million in 2008 from taka 210.60 million in 2007; it has become more than doubled in 2009 compared to that in 2008, and finally it has increased sharply from Taka 465.40 million in 2009 to Taka 1609.85 million in 2010 showing about 246 percent growth in the philanthropic expenditure. The table also shows that the philanthropic expenditure of all the banks has gone up to Taka 1609.40 million in 2010 from Taka 210.60 million in 2007, registering a total growth of about 664.41 percent in three years. Expenditure for health is the most priority area registering 45% of the total followed by the humanitarian and disaster segment covering 31% of the total. It is to be noted that banks expended for the environmental causes in the year 2010 for the first time and the figure is Taka 59.78 million. Table-1b shows that there were ups and downs in the strategic philanthropic expenditure of all the banks over the years; it increased to Taka 209.50 million in 2008 from Taka 15.80 in 2007 recording an increase of 1226 percent; it decreased to Taka 88.40 million in 2009 from Taka 209.50 million in 2008 showing a negative growth of about 58 percent; again it increased sharply to Taka 719.72 million in 2010 from Taka 88.40 in 2009 registering a dramatic growth of 714 percent. The proportion of expenditures among sports, arts and cultures, and others are 31 percent, 32 percent, and 37 percent, respectively and are very close. Table 1a: Expenditure for Philanthropic Activities [Taka in Million] 2010 %of Segments 2007 2008 2009 Total total Humanitarian 127.70 58.60 125.10 460.41 771.81 31 &Disaster Education 14.30 30.50 94.80 400.79 540.39 22 Health 68.60 112.10 245.50 689.07 1115.27 45 Environment 59.78 59.78 2 Total 210.60 201.20 465.40 1609.85 2486.25 100 Source: Bangladesh Bank (2011)


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Table 1b: Expenditure for Strategic Philanthropic Activities [Taka in Million] Segments 2007 2008 2009 2010 Total %of total Sports 2.70 49.80 1.20 265.23 318.93 31 Arts & Culture 0 0.80 0.30 328.91 330.01 32 Others 13.10 158.90 86.90 125.58 384.48 37 Total 15.80 209.50 88.40 719.72 1033.42 100 Source: Bangladesh Bank (2011)

Community Investment The banking sector in Bangladesh has significant community investments21 by way of donations to initiatives of civil society organizations, NGOs and institutions involved in health, education and culture for social and environmental improvement including nutrition, health and education among the underprivileged people. The following table shows the participation by different types of banks in various areas of community development.

Banks Having Community Investments by Way of Donations

Education

Health

Disaster Relief

Sports

Arts and Culture

Environment

others

Table 2: Number and Percentage of Banks Involved in Community Investment in 2010

34 (72 %)

22 (47 %)

21 (45%)

31 (66%)

13 (28%)

14 (30%)

11 (23%)

26 (55%)

Source: Author’s Own Calculation

Table-2 shows that about 72 percent scheduled banks in Bangladesh have community investment and disaster relief was the most priority segment of participation by banks in community development where about 66 percent banks covering 25 percent State-owned Commercial Banks (SOCBs), 25 percent Development Financial Institutions (DFI), 83 percent Private Commercial Banks (PCBs) and 44 percent Foreign Commercial Banks (FCBs) 21

Community investment deals with providing finance and technical assistance to underserved communities. It emphasizes on how companies manage their activities in the community they serve and create a positive impact for both the community and the business. (www.socialfunds.com/ci/types.cgi).

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donated to relief and rehabilitation programs for the people affected in different natural calamities. The sum of expenditure under disaster relief during 2007-2010 was Tk. 771.81 million. The education and health were also among the priorities where 47 percent banks (50 percent SOCBs, 50 percent DFIs, 50 percent PCBs and 33 percent FCBs) donated to education program. A total of 21 banks covering 45 percent of total banks (25 percent SOCB, 53 percent PCBs and 44 percent FCBs) sponsored a number of health care organizations by way of financial support to them. The sum of expenditure for education and health during 2007-2010 were Tk. 540.39 million and Tk. 1115.27 million, respectively (BB 2011). Financial Inclusion Financial inclusion is the delivery of financial services at an affordable cost to the disadvantaged and low income segments of society. It mainly focuses on the poor who do not have access to formal financial institution and getting them out of the clutches of local money lenders. Despite a large number of bank branches and micro finance institutions in our country, a large segment of our population particularly rural poor have limited access to banking services. In the first-ever Index of Financial Inclusion to find out the extent of reach of banking services among 100 countries, Bangladesh has been ranked 69 (Sarma 2008). The CSR guidelines issued by BB put special emphasis on reaching out with financial services to the less well-off population segments of the community in order to speed up financial inclusion of the large socially disadvantaged population segments. With the directive from BB, SOCBs opened 9.13 million new accounts for rural farmers with a nominal deposit as low as Tk. 10 for receiving direct transfers of government subsidy and also for savings and transaction purposes. In 2010, about 81 per cent banks (75 percent SOCBs, 100 percent DFIs, 80 percent PCBs and 78 percent FCBs) have undertaken credit programs for speeding up financial inclusion. Out of these programs- self-employment credit and SME lending programs were participated by about 79 percent banks covering 75 percent SOCBs, 75 percent DFIs, 80 percent PCBs and 78 percent FCBs; Installation of biomass processing plants and effluent treatment plants (ETPs) in manufacturing establishments was financed by 40.42 percent banks (25 percent SOCB, 25 percent DFI, 50 percent PCBs and 4.25 percent FCBs) ; Agricultural loans to small landholder farmers mainly through their rural branches for diversified production of crops, oilseeds, spices, vegetables, fruits, etc. were provided by almost all the banks (BB 2011).


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CSR Governance The recent initiatives of Bangladesh Bank have made significant change in regard to the creation of CSR governance frameworks in commercial banks of Bangladesh. In response to the BB circular22 requiring implementation of CSR with decisions taken at the highest corporate level (board of directors of the bank) 77% (36 out of 47) banks took decisions about their CSR involvement at the highest corporate level in 2010; 20 banks formed separate foundation or trusts to promote CSR activities. Almost all the banks have committed certain percentage of their pre-tax profit towards CSR activities. In-house CSR Practices & Encouraging Clients for CSR Practices In response to the directives of BB about 94 % banks (44 out of 47) have taken steps for adoption of socially and environmentally responsible practices in their in-house operations. Regarding reducing the environmental impact as a result of their operation and business activity 60 per cent banks (25 percent SOCBs, 50 percent DFIs, 70 percent PCBs, and 44 percent FCBs) reported to have taken positive actions towards it. A total of 57 per cent banks have taken steps to foster CSR in their client businesses in various economic sectors, assessing the social and environmental impacts of the enterprises seeking credit and are trying to ensure compliance with environmental standards while financing industrial projects, and that they have formulated environment policies in accordance with guidelines issued by the Government, in terms of which the environmental impacts are considered at the time of conducting credit risks analysis (BB-2010, 2011). CSR Reporting Generally, banks do not publish separate reports of their CSR activities and do not use comprehensive standard formats such as the GRI (BB 2010)23. However, in 2010 all the local banks (100%) have reported their CSR initiatives in their annual reports in line with the CSR guidelines of BB. A total of 51 percent banks have reported their CSR activities in separate chapters in their annual reports providing details of their programs including expenditures in most of the cases. FCBs in Bangladesh publish financial 22

DOS Circular No. 01 dated 1 June 2008, ‘Mainstreaming Corporate Social Responsibility (CSR) in banks and _financial institutions in Bangladesh’. 23

One notable exception is HSBC in Bangladesh, which has published Corporate Sustainability Report 2009 and 2010 covering some environmental issues.

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statements of their local operations only, which do not include information on CSR activities. However, one FCB issued a separate CSR report in Bangladesh in 2010. None of the banks operating in Bangladesh have issued separate reports of their CSR activities in comprehensive standard formats like GRI. Environmental Responsibility Environmental responsible practices are generally seen as part of CSR practices in the banking sector of Bangladesh. According to BB (2010), only 1 PCB and FCB have direct environmental involvement in 2009 as a part of their CSR activities. Moreover, during 2008 and 2009, about 17 percent PCB and 11 percent FCB have taken direct steps to provide aid and rehabilitation program to the people affected in different natural disaster (BB 2010). The CSR expenditures (disaster relief) by banks for environmental causes were TK. 127.7 million, TK. 58.6 million, TK. 125.1 million and 460.41 million in 2007, 2008 , 2009 and 2010, respectively. In recent years, some banks of the country have undertaken remarkable steps covering plantation, resource saving, financing green initiatives, etc. However, only 11 percent banks have separate funds to support environmental activities (Habib et al. 2010). Green Governance - The recent BB’s initiatives have made no significant change in regard to the creation of green governance frameworks in commercial banks till date. As of June, 2011, only 16 percent banks have environmental polices (Habib et al. 2011). About 26 percent commercial banks claimed to have CSR/environment related policies, 11 percent had related cell in mid 2010 and the survey shows only 12 percent banks have separate cells related to environmental banking and only 4 percent banks have formulated high level committee (comprising board members and employees) to oversee the green activities of banks (Habib et al. 2010). However, there is no doubt that the BB’s initiatives have brought remarkable change in the awareness and approach of banking communities. Internal Environment Management - Banks have very limited initiatives in regard to resource inventory preparation and management, paper, water and power saving, etc. It is good to observe that now a good number of banks are thinking or planning of introducing internal environment management initiatives. Almost three-fourths banks have online banking services and can offer online bank statement. Banks are generally aware of the necessity of


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adopting online banking to serve their customers. However, using online application as a tool to protect environment is not a part of the banking strategy in Bangladesh till date. Environmental Risk Mitigation - In regard to environmental risk mitigation, banks have been complying with the requirements of obtaining Clearance from the Department of Environment (DOE). However, it is obvious that the arrangement is hardly playing any role in environmental protection. It is found that 35 percent banks have some internal environmental risk management requirements or arrangements,24 and 30 percent have made plan to introduce some requirements in near future (Habib et al. 2011). Green Products or Financing - Though on a limited scale, almost all the banks of the country have some initiatives related to financing environment friendly projects. Nineteen banks have financed reasonably good amount in solar, bio-gas, ETP and HHK projects in recent years. One PCB financed irrigation project was powered by solar panels. A few banks have submitted targets (as required by BB at the request of the Ministry of Energy in 2010) to BB in regard to financing renewable energy projects. Availing Refinance Facilities of BB - A very insignificant portion of refinance facilities offered by BB was used by a few banks. Only five banks of the country availed refinance facilities as of June 30, 2011, and the current outstanding amount is less than BDT 14 crore which is less than 7 percent of the total available amount. However, it is encouraging that another 15 banks have entered into agreements with the BB to avail the facilities (Habib et al. 2011). About the refinance facility of jute sector, an amount of BDT 500 crore has already been disbursed to the four SOCBs in June 2010 with the guarantee of the Ministry of Finance for on-lending. Awareness, Promotional Activities, and NGO Linkages - Green marketing or promotional activities are yet to get popularity in the banking community. Only 32 percent banks have some kinds of promotional activities for their green initiatives. There are very limited instances of NGO-linkages of banks for green causes. About 52 percent banks have NGO-linkages. However, only 4 percent banks are found to have linkages with NGOs to promote green initiatives (Habib et al. 2011). A few banks have initiatives for 24

For example, engaging technicians to visit the site and report to the management.

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awareness development of consumers and employees. In 2010, it was found that 47 percent banks facilitate environment related training to their employees which actually meant that the banks from where at least one participant participated in environment related training programs arranged by the BB, BIBM or other NGOs (Habib et al. 2010). Sponsoring of green events by a few banks could prove to be very effective for green awareness in the country. Waste Management - Most of the banks of the country do not have any concrete waste management policy till date. However, a few banks have some inspiring initiatives for in-house waste management and financing. For example, HSBC recycles used papers to make envelope for re-use. Dutch Bangla Bank Limited has financed a project that produces quality organic fertilizer from fruits and vegetables wastes. Growing e-waste has been another related problem for banks. Few corporate offices in Bangladesh have taken initiatives regarding their reuse of e-waste. Some are distributing computers to different schools and organizations for reuse (Habib et al. 2011). Business Relevance of CSR Practices for the Banking Sector of Bangladesh The study examined the relationship between CSR expenditures and some other variables namely Total Revenues (TR), Net Income After Tax (NIAT), Number of Branches (NOB), and Deposit Growth (DG) using Pearson’s correlation coefficient, which measures the strength of a linear relationship between two variables. Table-3 shows that there is poor relationship between total revenue and CSR expenditure (r1) in 2008, moderate in 2009, and insignificant relationship in 2010. The value of r1 is not statistically significant, except in year 2009. Again, the value of r2 indicates that there is a negatively poor relationship between net income after tax and CSR expenditure in 2008, moderate relationship in 2010 and insignificant in 2009. Thus, it can be concluded that there is no relationship or unpredictable relationship between net income after tax and CSR expenditure. Moreover, the value of r is not statistically significant as Sig. (2-tailed) value is greater than 0.05. The values of r3 are -0.0489 and -0.0768 in 2008 and 2009, respectively which signify that there is negative poor relationship between number of branches and CSR expenditure. It might be due to the fact that the number of branches of SOCBs is more compared to that of PCBs while the CSR expenditures of PCBs are more compared to that of SOCBs. But due to some remarkable initiatives of BB, situation has been improved from negative


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correlation to positive one. However, it is clear that there is no statistically significant association between CSR expenditure and number of branches. Table-3 also shows that there is positive as well as negative relation between deposit growth and CSR expenditure. The values of r4 are 0.15, 0.45, and 0.02 in the year of 2010, 2009, and 2008, respectively indicating that there is no statistically significant correlation between CSR expenditure and deposit growth (Appendix Table-1) Table 3: Correlations between CSR Expenditure and TR(r1), CSR Expenditure and NIAT(r2), CSR Expenditure and NOB(r3), and CSR Expenditure and DG(r4) Year Correlation Coefficients

CSR Expenditure and TR (r1) CSR Expenditure and NIAT (r2) CSR Expenditure and NOB (r3) CSR Expenditure and DG (r4)

2010

2009

2008

0.1970 0.1970 0.07099 0.1510

0.4530 0.4040 -0.0769 0.4536

0.0035 -0.0019 -0.0489 -0.02798

Source: Author’s Own Calculations

6.

Conclusion

Corporate Social Responsibility practices by the banks have become an integral part of the business in recent years. The benefits of CSR include, among others, increased profits, customer loyalty, and positive brand outlook. As banks ultimately depend on tax payer’s money during their adversity, it is imperative on the part of the banks to run their business in a way that will not be detrimental to the long run interest of the society. It has been well documented by different studies that there exists a positive relationship between the level of and positive attitude towards CSR and the profitability of the business. Considering the relevance of CSR in the business, a number of global guidelines/initiatives have been adopted in recent years. The largest of all of these is the UN Global Compact- a CSR initiative comprising of 10 voluntary principles on human rights, labor rights, environment and anti-corruption applicable to all business sectors. In response to these worldwide growing consciousness regarding CSR activities, banks in Bangladesh have been actively participating in various social activities. Bangladesh Bank is leading the way as the regulator and released detailed directives for the banks in 2008 declaring some priority areas such as SME credit, financing of biomass

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processing plants, solar panels, waste recycling plants, effluent treatment plants measures for financial inclusion and mobile phone based services. A number of reward or incentives have been introduced by the BB for encouraging CSR practices among banks. Out of forty seven scheduled banks in Bangladesh forty six have more or less engagement in CSR activities in 2010. However, most of the financial institutions have not integrated CSR in their daily operations and most of the CSR activities by the banks in Bangladesh are in the form of philanthropy. The areas of involvement in CSR activities include community investment, environmental banking, financial inclusion, and CSR reporting. CSR governance and CSR reporting have also been receiving attention by Bangladesh Bank. The study also finds that no definite conclusion can be made about the relationship between CSR expenditure and total revenues, net income, and deposit growth of banks. In fine, it can be said that growing CSR practices in the banking sector will lead to sustainable development and establishment of an equitable society in Bangladesh.

REFERENCES Bangladesh Bank (BB), (2011), Review of CSR Initiatives in Banks 2010, Dhaka. Bangladesh Bank (BB), (2010), Review of CSR Initiatives in Banks 2008 & 2009, Dhaka. Banktrack (2003), The Collevecchio Declaration on Financial Institutions and Sustainability, Accessed on: www.banktrack.org/download/ collevecchio _ declaration_2/0_030401_-collevecchio_declaration.pdf November 23, 2011 Bhattacharya, C. B., N. C. Smith and D. Vogel (2004), “Integrating Social Responsibility and Marketing Strategy: An Introduction”, California Management Review, Vol. 47, No. 1, pp. 6-8. Brown, T. J. and P. A. Dacin (1997), “The Company and the Product: Corporate Associations and Consumer Product Responses”, Journal of Marketing, Vol. 61, pp. 68-84. Cannon, T. (1992), Corporate Responsibility, First Edition, London: Pitman Publishing.


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Decker, O. S. (2004), “Corporate Social Responsibility and Structural Change in Financial Services”, Managerial Auditing Journal, Vol. 19, No. 6, pp. 712-728. EPI-Finance (2000), “Environmental Performance Indicators for the Financial Industry”, Report of an International Project Undertaken by Financial Institutions, www.epifinance.com Frederick, William C. (1983), “Corporate Social Responsibility in the Reagan Era and Beyond”, California Management Review, Spring, Vol. XXV, No. 3, p. 149. Global Reporting Initiative (GRI), (2000-2011), Sustainability Reporting Guidelines Including Technical Protocols, Version 3.1, http://www. globalreporting.org/NR/rdonlyres/7DB67FFF-81EE-402F-A218-36940C883 DD5/0/G31GuidelinesinclTechnicalProtocolFinal.pdf Habib, Shah Md. Ahsan (2010), “Responsibilities of Banks in Environmental Protection in US Economy: Lessons for Bangladesh Banking Sector”, Post Doctoral Research Report under Fulbright Fellowship, Syracuse University, USA. Habib, Shah Md. Ahsan, Md. Shahid Ullah and Tahmina Rahman (2011), “An Impact Evaluation of Green Initiatives of Bangladesh Bank”, Banking Research Series 2011, Bangladesh Institute of Bank Management, Dhaka. Habib, Shah Md. Ahsan, Sarwar Uddin Ahmed and Uchida Shigeru (2007), “Environmental and Social Responsibilities of Banks: Global Perspective”, KEIEI TO KEIZAI (Journal of Nagasaki University), Vol. 87, No. 2, pp. 70-71. Hoare, S. (2004), “It is not Easy Being Green”, Financial World, June 2004, pp. 38-42. Hoque, Mohammad Ataul (2008), “Corporate and Social Responsibility”, The Bangladesh Accountant, July - September 2008, pp. 33-34. Jeucken, M. (2004), Sustainability in Finance: Banking on the Planet, The Netherlands: Eburon Academic Publishers. Jeucken, M. (2001), Sustainable Finance and Banking –The Financial Sector and the Future of the Planet, London: Earthscan Publishing. Jones, M.T. (1996), “Social Responsibility and the Green Business Firm”, Industrial and Environmental Crisis Quarterly, Vol. 9, No. 3, pp. 327–345.

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Mittal, R. Sinha and A. N. Singh (2008), “An Analysis of Linkage between Economic Value Added and Corporate Social Responsibility”, Management Decision, Vol. 46, No. 9, pp. 1437-1443. Rahman, Atiur (2011), Public Private Partnership and Corporate Social Responsibility for Social Development, Accessed in www.bangladeshbank.org mediaroom/speech/feb012011gs.pdf accessed March 10 2011. Rahman, Atiur (2010), New Era in Banking, NeoStar Alliance (NSA), www.bangladesh-bank.org/mediaroom/speech/may212010gs.pdf accessed on 21 May, 2010. Rahman, Atiur (2009), Meeting Social Goals through CSR, http://www.mrdibd.org/ downloads/ Meeting_social_goals_through_CSR.pdf Accessed in 13 July, 2010. Sarma, Mandira (2008), “Index of Financial Inclusion”, Working Paper, No. 215, Indian Council for Research on International Economic Relations. Sen, S. and C. B. Bhattacharya (2001), “Does Doing Good Always Lead to Doing Better? Consumer Reactions to Corporate Social Responsibility”, Journal of Marketing Research, Vol. 38, pp. 225-243. UNEPFI (2007), United Nations Environment Programme Finance Initiative, www.unepfi.org/about/index.html accessed on 15 November, 2011. UNGC (2009), United Nations Global Compact, www.unglobalcompact.org accessed on 20 November, 2011. World Business Council for Sustainable Development (WBCSD) (2006), From Challenge to Opportunity: The Role of Business in Tomorrow's Society. www.wbcsd.org, Accessed on 18 July, 2007. Appendix Table 1: Correlations between CSR Expenditure and Some Other Factors 2010

2009

2008

Total Net Number Deposit Total Net Number Deposit Total Net Number Deposit Revenue Income of Growth Revenue Income of Growth Revenue Income of Growth Branch Branch Branch CSR Expenses

Pearson Correlation Sig.(2-tailed) N

0.197 0.197 0071 0.151 0.453* 0.404 -0.077 0.454* 0.004 -0.002 -0.049 -0.028 0.242 0.243 0.676 0.372 0.039 0.069 0.740 0.039 0.987 0.993 0.825 0.899 37 37 37 37 21 21 21 21 23 23 23 23

Source: Author’s own Calculation