Green Banking: How Sustainable Banking is Strengthening Bangladesh’s Macroeconomic Landscape

Prof Muhammad Mahboob Ali, PhD :

In a world where weather patterns are becoming more extreme and natural disasters more frequent, a quiet revolution is taking place in Bangladesh’s banking sector-one that promises not just to protect our environment but to strengthen our entire economy.

This transformation centers on “green banking,” a concept that is rapidly moving from buzzword to business reality across the country’s financial landscape.For Bangladesh, a country the World Bank estimates could lose 2 per cent of its GDP to climate change by 2050, this shift represents much more than environmental responsibility.

It has become an economic imperative-a strategic response to the very real costs that climate change imposes on our infrastructure, agriculture, and public health.

Cyclone damage to roads and bridges requires massive reconstruction funds. Salinity intrusion from rising sea levels reduces agricultural output in coastal areas.

Pollution-related illnesses strain our healthcare system. These aren’t just environmental concerns-they’re economic drains that affect every citizen.

Greenbanking addresses these challenges by redirecting money from polluting industries toward sustainable alternatives.

It serves two crucial economic purposes that benefit everyone: First, it makes our financial system more secure. When banks lend to fossil fuel projects or industries vulnerable to climate regulations, they risk what experts call “stranded assets”-investments that become worthless as the world shifts toward cleaner technologies. Similarly, loans to businesses in flood-prone areas or those dependent on climate-sensitive water sources face higher default risks during environmental disasters. Green banking helps banks avoid these pitfalls by steering capital toward climate-resilient sectors.

Second, it creates new engines of economic growth. The money flowing into renewable energy projects, energy-efficient factories, sustainable agriculture, and recycling initiatives isn’t just preventing problems-it’s actively building a better economy.

These sectors generate employment in cutting-edge fields, stimulate technological innovation, and reduce our dependence on imported fossil fuels. Every solar panel installed means less money spent on imported oil and more jobs created locally.

The numbers tell a compelling story of rapid change. By December 2024, the sustainable banking portfolio of banks and financial institutions had grown to Tk 1,44,992 crore-a remarkable 38 per cent increase in just three months.

Even more telling, designated green bankingdisbursements reached Tk 86.46 billion in the last quarter of 2024 alone, growing at an impressive 27.2 per cent rate.

What’s particularly interesting is how different types of financial institutions are embracing this change.

Non-Bank Financial Institutions (NBFIs) have emerged as particularly enthusiastic adopters, with green banking making up 24.5 per cent of their term lending compared to 9.32 per cent for traditional banks.

This suggests that smaller, more specialized institutions see green financing as a competitive advantage in today’s market.

This growth isn’t accidental. It reflects both Bangladesh’s post-stability economic recovery and strategic decisions by financial institutions.

Many banks, facing challenges with non-performing loans, now view sustainable lending as a way to improve their long-term portfolio health while contributing to national development goals.

Looking ahead to the rest of 2025, the continued expansion of green banking promises tangible benefits that could touch every Bangladeshi’s life:Economists project that sustainable sectors could contribute an additional 0.5-0.7 per cent to GDP growth through renewable energy generation, energy efficiency savings, and green manufacturing.

This means more money circulating in our economy, supporting local businesses and communities. Perhaps most significantly for our national bankings, reduced fossil fuel imports through renewable energy adoption could decrease our import bill by 8-10%.

This would strengthen our currency reserves and reduce pressure on the national budget. The green transition is also expected to be a major job creator.

Projects in renewable energy installation, sustainable agriculture, and waste management could generate 500,000-700,000 new jobs, with many opportunities in rural and semi-urban areas where employment is most needed.

There’s also a potential fiscal benefit: decreased climate vulnerability might reduce government spending on disaster response and infrastructure repair by 12-15 per cent annually. This would free up resources for education, healthcare, and other vital social services.

None of this progress would be possible without the comprehensive framework established by Bangladesh Bank. Through its Sustainable Banking Policy (2020), the central bank has made green banking a core banking activity rather than a sidelined initiative.

The introduction of a “Green Taxonomy” provides clear, science-based criteria to distinguish genuinely sustainable projects from mere “greenwashing”-where companies make false environmental claims.

The implementation has followed a careful three-phase approach: starting with basic policy foundations, moving to sector-specific guidelines for industries like textiles and leather, and now advancing toward financial innovation and verified reporting.

This systematic approach has allowed banks to build their capabilities gradually while maintaining financial stability.

Despite the impressive progress, several challenges need addressing to maintain momentum. Many financial institutions still lack specialized expertise in assessing green projects, requiring enhanced training programs.

Green projects often face higher borrowing costs due to perceived risks and longer payback periods, necessitating targeted financial support.

There’s also a limited supply of “bankable” green projects ready for financing, calling for better project preparation facilities.

Perhaps most fundamentally, traditional lending mindsets that prioritize conventional collateral over environmental benefits still persist in some quarters, requiring demonstration of successful green lending models to build confidence.

The way forward requires collaborative action from all stakeholders:
Regulators are developing tiered incentive structures, including preferential refinancing schemes for green projects and developing a green bond market to attract international investment.

The government is introducing targeted fiscal incentives, including tax benefits for green technology adoption and co-investment in sustainable infrastructure projects.

Financial institutions are establishing dedicated green banking units, building technical capacity among loan officers, and developing innovative products tailored to different segments of the green economy.

Civil society organizations are promoting awareness and accountability through sustainability reporting and consumer education, helping create demand for green financial products.

The transformation of Bangladesh’s financial sector from traditional banking to green banking represents one of the most promising developments in our country’s recent economic history.

What began as theoretical discussion has become operational reality, demonstrating tangible benefits for both the environment and the economy.

The impressive growth metrics reflect a fundamental reorientation of how capital is allocated in our country. While implementation challenges remain, the strategic direction is firmly established.

As Bangladesh progresses through 2025 and beyond, the continued expansion of green banking will be crucial for building economic resilience, enhancing energy security, and ensuring sustainable prosperity for all citizens.

The foundations have been laid through careful planning and regulatory guidance. The task now is to accelerate implementation, overcome remaining barriers, and fully harness the macroeconomic potential of this transformative agenda.

For ordinary Bangladeshis, this transition means not just a cleaner environment but a more stable economy, new job opportunities, and greater protection from the economic shocks of climate change.

The green banking revolution offers our country the rare opportunity to do well by doing good-building both economic prosperity and environmental sustainability for generations to come.

Green banking offers a powerful array of interconnected benefits for a nation, promoting not only a cleaner environment but also a more stable economy, new job opportunities, and enhanced protection against the economic impacts of climate change.

This approach is about much more than environmental preservation; it aims to create a stronger, more secure future for all citizens.

A cleaner environment is the most immediate benefit of green banking. It involves financial support for projects that have positive ecological impacts, such as renewable energy initiatives like solar and wind farms, which reduce dependence on fossil fuels and lower air pollution.

It also includes investments in waste management through recycling facilities and waste-to-energy projects that help clean urban areas and minimise landfill use.

Furthermore, sustainable agriculture receives funding for practices that utilise less water and fewer chemicals, thereby safeguarding soil and water quality. Collectively, these efforts lead to improved air quality, safer drinking water, and healthier ecosystems.

Adomestic environment contributes to a more stable economy. By investing in local renewable energy sources, Bangladesh can decrease its reliance on expensive fossil fuel imports, saving significant foreign currency and stabilising the national budget.

This shift diversifies the economy, fostering new industries such as solar panel manufacturing and energy-efficient technologies, which strengthens the economy against downturns in traditional sectors.

Additionally, investing in climate-resilient infrastructure now is more cost-effective than dealing with the expenses of rebuilding after natural disasters, ultimately saving public funds and preventing economic disruptions.
The green economy generates new job opportunities, often in skilled positions across various sectors.

These jobs include manufacturing roles in solar panel and electric vehicle production, installation and maintenance of renewable energy systems, and positions in engineering and consulting focused on sustainable practices. Additionally, there are new opportunities in organic farming and climate-resilient agricultural techniques.

This expansion leads to a broader range of career options for young people and contributes to lower unemployment rates. Green banking enhances national resilience against economic shocks stemming from climate change. It supports agriculture through loans for drought-resistant seeds and irrigation systems, ensuring food security and stable incomes for farmers.

It also banking’s infrastructure improvements, such as stronger bridges and flood barriers, which help mitigate economic losses during disasters. By assisting businesses in adapting to climate impacts, green banking ensures continuity in operations and job retention.

In essence, green banking creates a virtuous cycle: a banking’s a solar power plant, which generates jobs in engineering and maintenance. The plant produces clean energy, reducing air pollution and import costs.

This increased reliance on renewable energy lessens vulnerability to fluctuating global oil prices, and savings can be redirected to essential services like education and healthcare, further stabilising the economy. Green Banking represents a strategic investment in a healthier, more prosperous, and secure Bangladesh for all its citizens.