商学研究第53巻第l号 (91) 91

Article

Environmental Risk Management Practice of Banks

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Contents

1. Introduction

2. Credit Risk Management Practice in Bangladesh

3. Methodology and Data

4. Results

5. Summary and Conc1usion

References

Abstract

Banks do not pollute the environment directly. But indirectly they finance the firms which are

responsible for environmental contamination. It is high time for banks to recognize their environmental

responsibility and make sure that the fund goes to the firms which are environmentally responsible. This

study is an a抗empt to study the status of environmental risk factors considered by the banks operating in

Bangladesh.τbe results of the study showed that, relatively new private commercial banks pioneering in considering environmental risk factors in their lending decisions

Keywords

Environmental risk, banks, lending decision, performönce, Bangladesh

採択目。 2012年 8 月 31 日

92 (92) 商学研究第53巻第1号

1. Introduction

Compared to the manufacturing sector, financial institutions, such as banks, are considered to

be environment affable. They provide financial services and are not involved in producing

hazardous chemicals or releasing toxic pollutants into the air, land or water. Apparent1y they

might be viewed as uninvolved with environmenta1 pollution and degradation (Sahoo and Nayak,

2008; Cowton and Thompson, 2000; Uchida et al., 2010). As a result strict environmental

degradation related criticisms are not direct1y pointed towards the banking sector. However banks

are one of the main sources of financing in an economy. Through their financing practices they

are supporting commercial activities that ultimately degrade the natural environment (Smith,

1993). They act as catalyst to environmental degradation by supplying the fund to support the

production process (Sarokin and Schulkin, 1991). Banks are indirectly involved in environmental

degradation by financing the firms which ultimate1y causes the damage. They need to admit the

responsibility and take necessary actions in order to minimize the damages caused by their

clients. By doing so banks wil1 not only be complying with laws or fulfil1ing philanthropic

responsibility, but a1so ensure their own sustainability (Ahmed et al., 2012a). Because enac加lent

of various laws (such as, Comprehensive Environmental Response Compensation and Liability

Act, 1976; European Commission Directive on Ci叫Liability for Damage Caused by Waste, 1989)

has gradually been moving towards an era where banks will be held responsible to pay the cleanｭ

up cost for the environmental damages caused by their clients. Before financing a particular loan

project banks must ensure that the proposal wil1 not cause any environmental damages and are

free from environmental risk. In addition to financial risk, business/indus廿y risk, management

risk, security risk, relationship risk, banks should also consider environmental risk factors.

Compared to developed countries, Bangladeshi banking sector is lagging behind in adopting

measures to incorporate environmental risk factors in lending decision making process. However

recently, Bangladesh Bank (BB) , the central bank, has adopted some policy guidelines (for

example , Environmental Risk Management (ERM) Guidelines for Banks and Financial

Institutions in Bangladesh 2011a; Policy Guidelines on Green Banking, 2011b) to encourage the

incorporation of environmental risk factors in lending decisions (Ahmed 2012b).τbe objective of

this study is to examine the level of consciousness among banks in incorporating these factors in

lending decisions.

Environmental Risk Management Practice of Banks (93) 93

2. Credit Risk Management Practice in Bangladesh

Credit Risk Management practice followed in Bangladesh has gone through a long

experimental process.τne tirst quantitative approach for credit risk management was introduced

by Bangladesh Bank in 1993 by circulating the Lending Risk Analysis (LRA) manual. Use of this

manual had been made compulsory by the banks and other tinancial institutions for loan size of

BDT 10 million and above (BB, 2005). Later on this manual was supplemented by Risk Grade

Score Card (RGSC) for risk assessment of credit proposals (BB, 2005). But this created confusion

among the tinancial institutions with two sets of lending risk standards. In order to remove 白is

puzzlement, in 2005 Bangladesh Bank developed Credit Risk Grading Manual (CRGM) to be

applied by banks and tinancial institutions in processing credit decisions and evaluating the

Coverage IndustryGrowth

Market Com petiti on

Barriersto Business

Fig. 1 Credit risk grading factors

(Source: Bangladesh Bank (BB) (2005) Credit Risk Grading Manual)

94 (94) 商学研究第53巻第1号

magnitude of risk involved. It has been made compulsory for all banks for all exposures and all

volumes except those covered under Consumer and Small Enterprises Financing Prudential

Guidelines and also under short-term agricultural and micro-credit. Five categories of risk are

considered , viz. , financial risk, business/industry risk, management risk, security risk,

relationship risk (see Fig. 1).

3. Methodology and Data

We have collected information for all (thirty) scheduled private commercia1 banks operating in

Bangladesh on their level of environmental consciousness while processing loan applications.

Structured questionnaires were distributed and filled in by credit analysts. For information

regarding return on assets (ROA) , age, turnover and to凶 assets of the banks, various secondary

information sources such as annual reports and websites were used.

4. Results

4.1 Environmental Factor Consideration

Based on the reported environmental risk factors considered, banks are classified into three

categories: highly conscious banks (HCB) , moderately conscious banks (MCB) , and poorly

conscious banks (PCB). Table 1 shows the number of banks fell in each category. Environmental

risk factor consideration score of below 70 is classified as poorly conscious banks (PCB) , score of

70 to 79 is cIassified as moderately conscious banks (MCB) , and score of 80 and above is

classified as highly conscious banks (HCB).

4.2 Environmental Consciousness and Performance

Banks classified according to their level of environmental consciousness are plotted for return

on assets, age, turnover and assets (see Figs. 2 to 5) .From 出e figures we c姐 see that, HCBs are

showing a relatively higher level of return on assets (ROA) ,lower age, higher turnover and

moderate level of total assets. PCBs on the other hand are showing lower level of return on assets

(ROA) , higher age, lower turnover and mixed level of total assets. Thus it can be said that,

Table1: Classi自cation of banks according to environmental compliance

Degr官氾 ofAutomation

Highly conscious banks

Moderately conscious banks

Poor1y ωnscious banks

No. of Banks Score

11

9

10

Environmental Risk Management Practice of Banks (95) 95

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Fig. 2 Percentage of return on assets (ROA)

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Fig. 4 Turnover of the banks (in 10 millions of BDT)

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Fig. 3 Age of the banks (in years)

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Fig. 5 Total assets (in 10 millions of BDT)

relatively new generation banks are more environment conscious and are showing higher

operational efficiency.

4.3 F Test

The parametric F-test (Ho: μ1= J.l2 =J.l3) has been tested to prove that the hypothesis of equali勿

of all the mean returns against the alternative are not true. We have found difference in mean

values among banks having different level of environmental consciousness with regard to return

on assets (ROA) , age, turnover and assets (see Table 2 to 5). However, F-test results support this

observation only in case of performance measured by ROA (see Table 2). In case of other

benchmarks such as age , turnover and assets, the difference in mean values among the

categories of banks having different level of consciousness could not be proved statistically (see

Table 3 to 5).

96 (96) 商学研究第53巻第l号

Table 2: Environmental consciousness and performance (ROA)

PCB MCB HCB

Sample Size (valid N ) 10 9 11

Mean 0.18 1.42 1.74

Variance 0.13 0.21 0.78

F-test 1.45

P-value 0.02

Decision: Reject the null hypothesis

Table 3: Environmental consciousness and age of the banks

PCB MCB HCB

Sample Size (valid N ) 10 9 11

Mean 24.20 18.78 7.76

Vぽlance 60.55 103.31 280.29

Fλtest 1.91

P-value 0.16

Decision: Do not reject the null hypothesis

Table 4: Environmental consciousness and turnover of the banks

Sample Size (valid N )

Mean

Variance

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Decision: Do not reject the null hypothesis

Table 5: Environmental consciousness and asset of the banks

Sample Size (valid N )

PCB

10

15.73

15.85

MCB

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19.73

76.05

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HCB

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Mean

Variance

F-test

P-value

Decision: Do not reject the null hypothesis

Environmental Risk Management Practice of Banks (97) 97

5. Summary and Conclusion

We have conducted this study to assess the level of environmental consciousness among the

private commercial banks operating in Bangladesh. The results of the study can be summarized

as follows:

1. Among the banks investigated we have found that, in terms of age relatively new generation

banks are more environment conscious. This might be due to the fact that comparatively new

banks are more adaptive to new challenges and efficient in incorporating them into risk

management pract兤e.

2. We have found a statistica11y sign泊cant difference in mean values of re加rn on assets 侭OA)

among banks having different level of environmental consciousness. Also HCBs have

significant1y higher level of ROAs compared to PCBs. lt indicates that environmentally

conscious banks are also rewarding banks. Or it may take the other way around, that

resourceful banks are more environment conscious (Ahmed et a1, 2012b)

The sample of this study has been confined to listed private commercial banks operating in

Bangladesh.τ'his might be considered as one of the limitations of this study. Also among the

sustainability banking risk factors, only environment has been considered. Further studies

incorporating other apposite risk factors such as social and governance risk factors, might be

conducted to see the entire scenario of sustainability banking development in Bangladesh.

References

Ahmed, S. U. , Islam, M. z. and Hasan, 1. (2012a) "Corporate Social Responsibility and Financial Performance

Linkage: Evidence from the Banking Sector of Bangladesh",]. Org. Management, Vol. 1 (1) , pp. 14-21.

Ahmed, S. U. , Islam, M. Z. , Mahtab, H. and Hasan, 1. (2012b) “ Institutional Investment and Corporate Social Performance: Linkage towards Sustainable Development", Coゆorate Social Re.ゆonsibili砂 and Environmental

Management, DOI: 1O.1002/csr.1298

Bangladesh Bank (BB) (2005) Credit Risk Grading Manual, Dhaka.

Bangladesh Bank (BB) (2011a): Environmental Risk Management (ERM) Guidelines for Banks and Financial

Institutions in Bangladesh, ]anuary 2011, Dhaka. Bangladesh Bank (BB) (2011b) Policy Guidelines for Green Banking, BRPD Circular No. 2, February 2011 , Dhaka Cowton, C.]. and Thompson,P. (2000) Do Codes Make a Difference? The Case of Bank Lending and the

Environment,]ournal 01 Business Ethics , 24, 165-178. Sahoo, P. and Nayak, B. (2008) Green Banking in India, Discussion Paper Series No. 125, Institute of Economic

Growth, University of Delhi Sarokin, D. and Schulkin,]. (1991) Environmental Concerns and the Business of Banking, Journal 01 Commercial

Bank Lending, 74 (5) ,6--19. Smi白， D. R (1993) Environmenta1 Risk: Credit Approaches and Opportunities, an Interim Report (United Nations

Environment Programme, Geneva).

98 (98) 商学研究第53巻第l号

Uchida, S. , Ahmed, S. U. and Kheya, S. H. (2010) , A Comparison of Reported and Disc10sed Corporate Governance

Compliance Status in the Banking Sector of Bangladesh, Annual Review olSoutheast Asian Studies, Vo1.51, pp.

87-97

NOTE

合SarwarUddin Ahmed, Associate Professor, School of Business, Independent University Bangladesh

**Shigeru Uchida, Professor, Faculty of Business and Commerce, Aichi Gakuin University