Helping stitch together a sustainable garment industry in Bangladesh
Expanded access to finance supported by ADB will allow factories to meet international standards so Bangladesh may benefit from this industry in a responsible way.
Bangladesh has focused on developing the garment industry, key for the country’s economy, in a sustainable way since deadly accidents such as the 2012 Tazreen factory fire and the 2013 Rana Plaza building collapse put the global spotlight on the unsafe working conditions of the country’s garment factories.
The international outcry that followed both tragedies prompted a coordinated response from stakeholders such as the European Union, the US and the International Labor Organization, which started to work with the Bangladeshi government to improve labor rights, the structural integrity of factory buildings, and occupational safety and health. A group of mostly European apparel companies soon founded the Accord on Fire and Building Safety, while US firms established the Alliance for Bangladesh Worker Safety. In just over a year, both entities investigated about 1,900 factories and forced 47 of them to partially or fully close down, thus preventing potential further injury and loss of lives.
The Accord and the Alliance then urged all garment factories in the country to implement Corrective Action Plans (CAPs) to bring their environmental, health, and safety standards to international levels. The costs of implementing the CAPs are estimated to be $250,000–$400,000 per factory, and much more if a factory needs to be relocated or rebuilt. Many compliant businesses also need financing to expand their operations and thus satisfy the demand for responsibly produced garments. Unfortunately, most local banks are unable to extend long-term competitive credit in dollars; garment exporters need credit in dollars to import equipment, and dollar finance also has a lower interest rate than loans in rupees.
After holding discussions with local financial institutions and international buyers like Inditex, the Spanish owner of Zara and several other fashion brands, we were convinced that ADB could, and should, play a role in filling this financing gap.
We had to move fast, though, as more delays in implementing the CAPs increases the risk of more deadly accidents that would in turn further damage the international reputation of the garment industry in Bangladesh, currently the world’s second largest exporter of ready-made garments after the People’s Republic of China with a total export volume of $32 billion in 2015 and employing over 4.2 million workers, primarily women.
The project was a challenging one from the beginning, with hurdles ranging from political instability, a weak regulatory regime, and concerns about the credit quality of some of the local banks to environmental and social safeguard issues.
One advantage, though, is that we knew all the leading banks in Bangladesh through ADB’s active Trade Finance Program, which helped us identify the most suitable partner. We finally decided to work with BRAC Bank to channel $30 million in loans to factories so these can improve their safety standards and give better working conditions for 22,000 female garment industry workers. Founded in 2001 as a private commercial bank to serve the country’s huge unbanked population and support small and medium-sized enterprises, BRAC Bank has since then become one of the top financial institutions in Bangladesh.
During the due diligence process, we were positively surprised when some of the garment factories we visited had been indeed upgraded, with larger buildings including fire exits and other security features required by the Accord and the Alliance. Some factories had even set up day care centers for children of employees, and when a small earthquake hit, we witnessed how 4,000 people evacuated a factory safely in an orderly fashion. These factories present a stark contrast to what we expected from the garment industry in Bangladesh; although much work remains to be done, this is definitely a step in the right direction.
Overcoming all the implementation challenges required a real team effort. Our safeguards team was able to resolve some complex safeguard issues so BRAC Bank could improve its environmental and social management system to meet our requirements and obtain a Gender Equity classification. Colleagues from other departments helped us develop a robust transaction structure to mitigate the credit risk, and resident mission staff were instrumental to overcoming regulatory hurdles in working with the Bangladesh government.
According to the Asian Development Outlook 2016 published a month ago, Bangladeshi exports increased by 8.9% in the first 8 months of 2016, significantly up from 2.4% year-on-year, with garment exports growing by 9.5% in part as a reflection of improved safety standards and worker rights in the garment industry.
We hope expanded access to finance will allow more factories to upgrade their facilities to international standards so Bangladesh may continue to benefit from this industry, albeit from now on in a sustainable way.