An Analytical insight on the financial system in Bangladesh
Chapter One: – Introduction
Origin of the report
This report is prepared as the partial fulfillment of BBA program under National University, Bangladesh. The origin of the report includes a comprehensive study on the overall financial system of Bangladesh. It attempts to analyze the contributions of different institution in our financial market and to the flow of fund from the supplier to borrower i.e. from surplus units to the deficit units.
This also attempts to analyze the different and separate entities and participants of the financial system of Bangladesh. Its usually includes the analysis of performance of those institutions as well as the regulatory bodies available to regulate their activities.
Scope of the report
This report covers the following different areas and modules
- The financial system of Bangladesh
- The activities of financial institutions in Bangladesh
- The operations of the financial market in Bangladesh
- The regulatory bodies and legal framework within which it operates
- The performance and contributions of these financial institutions in Bangladesh
Methodology of the report
The methodology of the report is an analytical observation of the flow of funds and operations of the financial market and instructions in Bangladesh. This report is prepared on the basis of secondary information. The analysis on the basis of published yearly report of different bodies of the respective sectors.
Objectives of the report
· To analyze the operational flow of money in Bangladesh
· To evaluate the effectiveness of the financial system in Bangladesh
· To illustrate the overall performance of the financial system in Bangladesh
· To establish some new systematic and more effective flow of fund and the utilization of those funds
Sources of Information
The information included in the report is mostly collected from secondary sources. The published reports on the financial system in Bangladesh by different professional institution are being used to conduct the study. The performance analysis and interpretation of the information are based on the yearly and other periodic report of different sectors of financial system in Bangladesh. Other valuable information is collected from different research paper/article and other secondary sources. Some of the information also collects from different wed sites of the different institutions involved in financial system in Bangladesh.
Limitations of the report
The report was completed and submitted in time despite of the following limitations
· A comprehensive study to collect primary information could no possible
· The sources of information was not up to date, that why we had to relay on some back dated information
· A detailed graphical and mathematical analysis is overlooked because of the time constraints
· There is a clear conflicting arguments between the govt. and non-govt. published report on financial system in Bangladesh
· We had to use our own judgments in some cases when we didn’t have any clear idea about the reliability of the in formation.
Chapter Two: – A brief overview of Financial System in Bangladesh
The financial system in a country is subject to a set of various participants and different bodies that helped to operate the financial system of a country under the close supervisions of regulatory bodies. The regulatory bodies and participants may be differing from country to country.
In Bangladesh, the Ministry of Finance, the Bangladesh Bank, the Securities and Exchange Commission (SEC) etc. are the major regulatory bodies exercising the regulatory control and supervision over the functioning of the financial system in the country.
The different participants or entities involved in the financial system of Bangladesh and originated the operations of the financial system can be shown by the following simple diagram
| Regulatory Bodies |
| Savers |
(Investors)
| Spenders |
(Issuers)
| Regulatory Bodies |
| Intermediaries |
| Financial Securities |
| Cash |
Figure: Representation of origin of financial system
The financial system of Bangladesh consists of Bangladesh Bank (BB) as the central bank, 4 State Owned Commercial Banks (SCB), 5 government owned specialized banks, 30 domestic private banks, 9 foreign banks and 29 non-bank financial institutions. Moreover, MRA has given license to 298 Micro-credit Organizations. The financial system also embraces insurance companies, stock exchanges and co-operative banks.
Slide 1: Central Bank
Slide 2: Banking Sector
Slide 3: Non-banking Financial Institutions (NBFIs)
Slide 4: Capital Market
Slide 5: Microfinance Institutions (MFIs)
Except for the transformation of three nationalized commercial banks into public limited companies which are now known as state-owned commercial banks (SCBs), the structure of the financial system remains almost unchanged since June5. Bangladesh’s financial sector consists of the Bangladeshi Bank (the central bank), four nationalized commercial banks (NCBs), 5 state-owned specialized banks (SBs), more than 30 private sector commercial banks (PCBs) and more than 9 foreign commercial banks (PCBs). The rest of the financial sector consists of more than 29 non-bank financial institutions, the capital market, the insurance companies, the cooperative banks and the micro-finance institutions. Activities in the financial sector which was dominated by the inefficient NCBs a few years back are being replaced by the relatively more efficient PCBs and PCBs. The share of the financial sector in GDP is about 1.70% (FY06), which has remained quite steady over time. The contribution to GDP mostly comes from the banking sector. Its share in GDP has declined from 1.35 per cent in FY1995 to 1.27 in FY 2006. The contribution of insurance to GDP, although has shown a rising trend, is less than 0.40 per cent. Overall employment in the financial sector is about 0.10 million with the private sector employment rising while the public sector employment falling. Currently, the sector contributes about 1.50 per cent in government revenue.
Chapter Three: – Central Bank/Bangladesh Bank and its Policy
3.1 About the Bangladesh Bank
Bangladesh Bank (BB), as the central bank, has legal authority to supervise and regulate all banks and non-bank financial institutions. It performs the traditional central banking roles of note issuance and of being the banker to the government and banks. Given some broad policy goals and objectives, it formulates and implements monetary policy manages foreign exchange reserves and lays down prudential regulations and conduct monitoring thereof as they apply to the entire banking system. Its prudential regulations include, among others: minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. The Bangladesh Bank has the power to impose penalties for non-compliance and also to intervene in the management of a bank if serious problem arise. It also has the delegated authority of issuing policy directives regarding the foreign exchange regime.
Bangladesh Bank, the central bank of the country, was established as a body corporate vide the Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972) with effect from 16th December, 1971. The general superintendence and direction of affairs and business of the Bank are entrusted to a nine member Board of Directors which consists of the Governor as chairman, a Deputy Governor, three senior government officials and four persons having experience and proven capacity in the fields of banking, trade, commerce, industry or agriculture – all nominated by the government. The board, which is the highest policy making body, meets at least six times a year and at least once every quarter under the chairmanship of the Governor. The Governor, appointed by the government as the chief executive officer, directs and controls all the affairs of the Bank on behalf of the Board.
The broad objectives of the Bank are:
· To regulate the issue of the currency and the keeping of reserves;
· To manage the monetary and credit system of Bangladesh with a view to stabilizing domestic monetary value;
· To preserve the par value of the Bangladesh Taka;
· To promote and maintain a high level of production, employment and real income in Bangladesh; and to foster growth and development of the country’s productive resources for the national interest
Vision
The Bangladesh Bank (BB), through ensuring the quality of services and the competence of its staff, shall operate as a modern, dynamic, effective, and forward-looking central bank to manage the country’s monetary and financial system with a view to stabilizing the internal and external value of Bangladesh Taka conducive to rapid growth and development of the economy.
Missions
To uphold the vision and in pursuant with the Bangladesh Bank Order of 1972, Bangladesh Bank’s mission is to promote and maintain macroeconomic and price stability through:
| · Formulating and implementing appropriate monetary policy consistent with the country’s national development goals; | |
| · Pursuing prudent policies to ensure stable internal and external value of Taka; | |
| · Identifying policy priorities for implementation by the Government through assessing the transmission channels and the interactions of monetary policy with fiscal, exchange rate, and other macroeconomic policies and their impact on the economy; | |
| · Proposing necessary legislative measures to attain the central bank’s objectives and perform its functions including strategies and regulations for and supervision of banking companies and financial institutions with the aim to providing efficient financial intermediation and financial services to large, medium, small, and micro enterprises and to pro-poor activities ; | |
| · Promoting, regulating and ensuring a secure and efficient payment system, including the issue of Bank Notes; | |
| · Giving advice to the Government on the interaction of monetary policy with fiscal and exchange rate policies, on the impact of various policy measures on the economy; | |
| · Analyzing priority macroeconomic issues for policy advice and dissemination of information to attain the central bank’s social responsibility. |
To this end, BB would ensure that it has the requisite human and infrastructural resources and build its capability to promote and ensure a robust and well-functioning financial sector. This mission statement pledges that the guiding philosophy of BB’s operations would be sound regulatory framework conducive to the operation of efficient market mechanism along with transparency and accountability, professionalism, ethical standards, adoption of modern technology in operational and decision making processes, and trust and respect in all relations. Periodic strategic planning would serve to identify the emerging challenges, key changes affecting BB’s internal and external environment and set its strategic guidelines, set priorities, promote improvements in management practices, and induce necessary changes in organizational culture.
3.2 The policies of Bangladesh Bank
To fulfill its mission, BB would undertake activities related to developing the national financial system and management of monetary, foreign exchange, and credit policies. The Bangladesh Bank’s core mission strategies cover both monetary policy and financial sector developments.
3.2.1 Monetary Policy
The aim is to achieve the twin goals of containing inflation and promoting sustained and stable economic growth; provide policy advice to the Government on deficit financing and public debt management; manage the balance of payments and foreign exchange reserves; provide payment services and ensure the stability of the financial system; conduct treasury and government securities related operations; and efficiently perform other international financial activities.
3.2.2 Financial Sector Developments
Critical activities cover the development of the financial systems; provide effective prudential supervision; ensure information access, market intelligence, and contingency planning to avoid systematic risks; assist banking and financial entities to become efficient and competitive; discover new modalities for delivering agricultural and industrial term credit; enhance the access of small and medium enterprises to investment funds; further develop the market in public and private debt and risk capital; and promote measures for inclusion of people hitherto bypassed in formal financial systems.
In addition, the Bangladesh Bank will continuously adopt necessary measures for taking a proactive stance in decision making; compiling relevant statistics and conducting high quality and timely economic research to review the country’s financial and economic conditions to support decision making; ensuring efficient and professional management of BB’s human and financial resources; and establishing BB’s distinct identity based on its values and strategic roles.
In order to uphold the mission, Bangladesh Bank’s aim would be to provide the required leadership by discharging its duties in a manner that shows a clear vision, is watchful, far-sighted, intelligent and responsive based on an effective and efficient communication strategy. At all times, BB’s aim would be to remain committed, efficient, capable, logistically supported, speedy, focused, and aggressive where necessary in order to ensure that the Bangladesh Bank always remains a credible and prestigious institution with an efficient organizational structure committed to achieving its goals.
3.2.3 Interest Rate Policy
Under the Financial sector reform program, banks are free to charge/fix their deposit (Bank /Financial Institutes) and Lending (Bank /Financial Institutes) rates other than Export Credit. At present, Loans at reduced rates (7%) are provided for all sorts of export credit since January 2004. With a view to controlling the price hike and ensuring adequate supply of essential commodities, the rate of interest on loan for import financing of rice, wheat, sugar, edible oil (crude and refined), chickpeas, beans, lentils, onions, spices , dates and powder milk has been temporarily fixed to a maximum of 12%.
Now, banks can differentiate interest rate up to 3% considering comparative risk elements involved among borrowers in same lending category. With progressive deregulation of interest rates, banks have been advised to announce the mid-rate of the limit (if any) for different sectors and the banks may change interest 1.5% more or less than the announced mid-rate on the basis of the comparative credit risk. Recently Banks have been advised to upload their deposit and lending interest rate in their respective website.
3.2.4 Capital Adequacy of the Banks
With a view to strengthening the capital base of banks and making them prepare for the implementation of Basel-II Accord, banks are required to maintain Capital to Risk-Weighted Assets ratio 10% at the minimum with core capital not less than 5% effective from December 31, 2007. However, minimum capital requirement (paid up capital and statutory reserve) for all banks will be Tk.200 crore as per Bank Company (Amendment) Ordinance, 2007. Banks having capital shortfall will have to meet at least 50% of the shortfall by June, 2008 and the rest by June, 2009.
Revaluation reserves of held to maturity (HTM) securities (up to 50% of the revaluation reserves) has been added to the components of supplementary capital. Besides, ‘Hedging the price risk of commodity transactions’ has been included in Short-term self liquidating trade related contingencies.
3.2.5 Loan Classification and Provisioning
In order to strengthen credit discipline and bring classification and provisioning regulation in line with international standard, Bangladesh Bank issued a master circular on loan classification and provisioning through BRPD circular no 5 dated June 5, 2006. The revised policy covers an independent assessment of each loan on the basis of objective criteria and qualitative factors which is appended below:
Any Continuous Loan/Demand Loan if not repaid/renewed within the fixed expiry date for repayment will be treated as past due/overdue from the following day of the expiry date. A Continuous Loan/Demand loan/Term Loan which will remain overdue for a period of 90 days or more will be put into the “Special Mention Account (SMA)”. Interest accrued on “Special Mention Account (SMA)” will be credited to Interest Suspense Account, instead of crediting the same to Income Account.
A Continuous Loan/Demand loan is classified as ‘Sub-standard’ if it is past due/over due for 6 months or beyond but less than 9 months, classified as `Doubtful’ if it is past due/over due for 9 months or beyond but less than 12 months and classified as `Bad/Loss’ if it is past due/over due for 12 months or beyond.
If any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid within the due date, the amount of unpaid installment(s) will be termed as `defaulted installment’. In case of Fixed Term Loans, which are repayable within maximum five years of time- If the amount of ‘defaulted installment’ is equal to or more than the amount of installment(s) due within 6 (six) months, the entire loan will be classified as “Sub-standard”, if the amount is equal to or more than the amount of installment(s) due within 12 (twelve) months, the entire loan will be classified as “Doubtful” and if the amount is equal to or more than the amount of installment(s) due within 18 (eighteen) months, the entire loan will be classified as “Bad/Loss”.
In case of Fixed Term Loans, which are repayable in more than five years of time and if the amount of ‘defaulted installment’ is equal to or more than the amount of installment(s) due within 12 (twelve) months, the entire loan will be classified as “Sub-standard”. If the amount is due within 18 (eighteen) months, the entire loan will be classified as “Doubtful” and if the amount is due within 24 (twenty four) months, the entire loan will be classified as “Bad/Loss”.
The Short-term Agricultural and Micro-Credit will be considered irregular if not repaid within the due date as stipulated in the loan agreement. If the said irregular status continues, the credit will be classified as ‘Substandard ‘ after a period of 12 months, as ‘Doubtful’ after a period of 36 months and as ‘Bad/Loss’ after a period of 60 months from the stipulated due date as per loan agreement.
Besides, if any situational changes occur in the stipulations in terms of which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if the value of the securities decreases or if the recovery of the loan becomes uncertain due to any other unfavorable situation, the loan will have to be classified on the basis of qualitative judgment.
As regards the provision, banks are required to maintain General Provision against all categories of loans along with off-balance sheet items in the following manner:
| Particulars | Short Term Agri. Credit and micro credit | Consumer Financing | Small Enterprise Financing | All other Credit | |||
| Other than Housing Finance & Loans for Professionals to set up business | Housing Finance | Loans for Professionals to set up business | |||||
| UC | Standard | 5% | 5% | 2% | 2% | 1% | 1% |
| SMA | – | 5% | 5% | 5% | 5% | 5% | |
| Classified | SS | 5% | 20% | 20% | 20% | 20% | 20% |
| DF | 5% | 50% | 50% | 50% | 50% | 50% | |
| B/L | 100% | 100% | 100% | 100% | 100% | 100% | |
Besides, banks are required to maintain general provision against Off-balance sheet exposures in the following manner:
(i) @ 0.5% provision effective from December 31, 2007 and
(ii) @ 1% provision effective from December 31, 2008.
Other instructions such as Eligible securities in determining base for provision along with a revised format for submitting the report on classification of loans and advances are also provided in the respective circulars.
Reference:
- BRPD circular no: 05, dated June 5, 2006.
- BRPD circular no: 08, dated August 07, 2007
- BRPD circular no: 10, dated September 18, 2007
- BRPD circular no: 05, dated April 29, 2008
3.2.6 Foreign Exchange System
On March 24, 1994 Bangladesh Taka (domestic currency) was declared convertible for current transactions in terms of Article VIII of the IMF Articles of Agreement. Consequent to this, current external settlements for trade in goods and services and for amortization payments on foreign borrowings can be made through banks authorized to deal in foreign exchange, without prior central bank authorization. However, because resident owned capital is not freely transferable abroad (Taka is not yet convertible on capital account), some current settlements beyond certain indicative limits are subject to bonfires checks.
Direct investments of non-residents in the industrial sector and portfolio investments of non-residents through stock exchanges are reparable abroad, as also are capital gains and profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior Bangladesh Bank approval, which is allowed only sparingly.
3.2.7 Exchange Rate Policy
The exchange rate policy of Bangladesh Bank aims at maintaining the competitiveness of Bangladeshi products in the international markets, encouraging inflow of wage earners’ remittances, maintaining internal price stability, and maintaining a viable external account position. Prior to the inception of floating exchange rate regime, adjustments in exchange rates were made while keeping in view the trends of Real Effective Exchange Rate (REER) index based on a trade weighted basket of currencies of major trading partners of Bangladesh and the trends of other important internal and external sector indicators. Under the existing floating exchange rate regime (that started from 31/05/2003), the interbank foreign exchange market sets the exchange rates for customer transactions and interbank transactions based on demand-supply interplay; while the exchange rates for the Bangladesh Bank’s spot purchase and sales transactions of US Dollars with ADs is decided on a case to case basis. Bangladesh Bank does not undertake any forward transaction with ADs. The ADs are free to quote their own spot and forward exchange rates for interbank transactions and for transactions with non-bank customers. However, along with intervention in the taka money market, the US dollar purchase or sale transactions take place by the Bangladesh Bank as needed, to maintain orderly market conditions.
3.2.8 Bank Licensing
Bank Company Act, 1991, empowers BB to issue licenses to carry out banking business in Bangladesh. Pursuant to section 31 of the Act, before granting a license, BB needs to be satisfied that the following conditions are fulfilled: “that the company is or will be in a position to pay its present or future depositors in full as their claims accrue; that the affairs of the company are not being or are not likely to be conducted in a manner detrimental to the interest of its present and future depositors; that, in the case of a company incorporated outside Bangladesh, the Government or law of the country in which it is incorporated Bangladesh as the Government or law of Bangladesh grants to banking companies incorporated outside Bangladesh and that the company complies with all applicable provisions of Bank Companies Act, 1991.”
Licenses may be cancelled if the bank fails to comply with above provisions or ceases to carry on banking business in Bangladesh.
Chapter Four: – Banking Sector in Bangladesh
The Jews in Jerusalem introduced a kind of banking in the form of money lending before the birth of Christ. The word ‘bank’ was probably derived from the word ‘bench’ as during ancient time Jews used to do money -lending business sitting on long benches.
First modern banking was introduced in 1668 in Stockholm as ‘Savings Pis Bank’ which opened up a new era of banking activities throughout the European Mainland.
In the South Asian region, early banking system was introduced by the Afghan traders popularly known as Kabuliwallas. Muslim businessmen from Kabul, Afghanistan came to India and started money lending business in exchange of interest sometime in 1312 A.D. They were known as ‘Kabuliawallas’.
4.1 Number and Types of Banks
The number of banks in all now stands at 49 in Bangladesh. Out of the 49 banks,
- Four are Nationalized Commercial Banks (NCBs),
- 28 local private commercial banks,
- 12 foreign banks and
- Five are Development Financial Institutions (DFIs).
On the basis of contribution to the financial market
- Sonali Bank is the largest among the NCBs
- While Pubali is leading in the private ones.
- Among the 12 foreign banks, Standard Chartered has become the largest in the country.
Besides the scheduled banks, there are four others banks functioning in the financial sector, these are
- Samabai (Cooperative) Bank,
- Ansar-VDP Bank,
- Karmasansthan (Employment) Bank and
- Grameen bank.
The number of total branches of all scheduled banks is 6,038 as of June 2008. Of the branches, 39.95 per cent (2,412) are located in the urban areas and 60.05 per cent (3,626) in the rural areas. Of the branches NCBs hold 3,616, private commercial banks 1,214, foreign banks 31 and specialized banks 1,177.
4.2 Services provided by the participants of banking sector in Bangladesh
4.2.1 Accounts, Current, FDR, PDS, Deposit Scheme
Current Account: Generally this sort of account opens for business purpose. Customers can withdraw money once or more against their deposit. No interest can be paid to the customers in this account. If the amount of deposit is below taka 1,000 on an average the bank has authority to cut taka 50 from each account as incidental charge after every six months. Against this account loan facility can be ensured. Usually one can open this account with taka 500. One can open this sort of account through cash or check/bill. All the banks follow almost the same rules for opening current account.
4.2.2 Savings Bank Account
Usually customers open this sort of account at a low interest for only security. This is also an initiative to create people’s savings tendency. Generally, this account is to be opened at taka 100. Interest is to be paid in June and December after every six months. If money is withdrawn twice a week or more than taka 10,000 is withdrawn (if 25% more compared to total deposit) then interest is not paid. This account guarantees loan. Almost all the banks follow the same rules in the field of savings account, except foreign banks for varying deposit. On an average, all the banks give around six percent interest.
4.2.3 Special Services
Some Banks render special services to the customers attracting other banks.
4.2.4 Internet Banking
Customers need an Internet access service. As an Internet Banking customer, he will be given a specific user ID and a confident password. The customer can then view his account balances online. It is the industry-standard method used to protect communications over the Internet.
To ensure that customers’ personal data cannot be accessed by anyone but them, all reporting information has been secured using Version and Secure Sockets Layer (SSL).
4.2.5 Home Banking
Home banking frees customers of visiting branches and most transactions will be automated to enable them to check their account activities transfer fund and to open L/C sitting in their own desk with the help of a PC and a telephone.
4.2.6 Electronic Banking Services for Windows (EBSW)
Electronic Banking Service for Windows (EBSW) provides a full range of reporting capabilities, and a comprehensive range of transaction initiation options.
The customers will be able to process all payments as well as initiate L/Cs and amendments, through EBSW. They will be able to view the balances of all accounts, whether with Standard Chartered or with any other banks using SWIFT. Additionally, transactions may be approved by remote authorization even if the approver is out of station.
4.2.7 Automated Teller Machine (ATM)
Automated Teller Machine (ATM), a new concept in modern banking, has already been introduced to facilitate subscribers 24 hour cash access through a plastic card. The network of ATM installations will be adequately extended to enable customers to non-branch banking beyond banking.
4.2.8 Tele Banking
Tele Banking allows customers to get access into their respective banking information 24 hours a day. Subscribers can update themselves by making a phone call. They can transfer any amount of deposit to other accounts irrespective of location either from home or office.
4.2.9 SWIFT
SWIFT is a bank owned non-profit co-operative based in Belgium servicing the financial community worldwide. It ensures secure messaging having a global reach of 6,495 Banks and Financial Institutions in 178 countries, 24 hours a day. SWIFT global network carries an average 4 million message daily and estimated average value of payment messages is USD 2 trillion.
SWIFT is a highly secured messaging network enables Banks to send and receive Fund Transfer, L/C related and other free format messages to and from any banks active in the network.
Having SWIFT facility, Bank will be able to serve its customers more profitable by providing L/C, Payment and other messages efficiently and with utmost security. Especially it will be of great help for our clients dealing with Imports, Exports and Remittances etc.
4.3 Banks of Bangladesh at a glance
Nationalized Commercial Banks (NCBs)
| Name | Number of branches | Deposits |
(As of June, 2000)Special Services 1. Sonali Bank1299Taka 168,187 millionIndustrial, Agri loan, Poverty alleviation, etc.2. Janata Bank898Taka 96,000 millionIndustrial & agri loan, Poverty alleviation, etc.3. Agrani Bank903Taka 100,000 millionIndustrial & agri loan, poverty alleviation, etc.4. Rupali Bank513Taka 42,485 millionIndustrial & Agri loan, etc.
Private Banks
| 1. Pubali Bank | 350 | Taka 27,000 million | Industrial & agri loan, etc. |
| 2. Uttara Bank | 198 | Taka 21,979 million | Industrial & agri loan, etc. |
| 3. National Bank Ltd. | 66 | Taka 20,850 million | Industrial & agri loan, etc. |
| 4. The City Bank Ltd. | 76 | Taka 13,750 million | Industrial & agri loan, etc. |
| 5. United Commercial Bank Ltd. | 79 | Taka 10,000 Million | Industrial & agri loan, etc. |
| 6. Arab Bangladesh Bank Ltd. | 61(60+1) | Taka 13,206 million | Industrial & agri loan, etc. |
| 7. IFIC Bank Ltd. | 60(58+2) | Taka 17,032 million | Industrial & agri loan, etc. |
| 8. Islami bank Bangladesh Ltd. | 110 | Taka 27,750 million | Industrial & agri loan, etc. |
| 9. Al Baraka Bank Bangladesh Ltd. | 34 | Taka 9,000 million | Industrial & agri loan, etc. |
| 10. Eastern Bank Ltd. | 21 | Taka 12,600 million | Industrial & agri loan, etc. |
| 11. National Credit & Commerce Bank Ltd. | 30 | Taka 9,700 million | Industrial & agri loan, etc. |
| 12. Prime Bank Ltd. | 23 | Taka 8,550 million | Industrial & agri loan, etc. |
| 13. Southeast Bank Ltd. | 12 | Taka 7,140 million | Industrial & agri loan, etc. |
| 14. Dhaka Bank Ltd. | 12 | Taka 7,290 million | Industrial & agri loan, etc. |
| 15. Al-Arafah Islami Bank Ltd. | 35 | TK.7400 Million | Industrial & agri loan, etc. |
| 16. Social Investment Bank Ltd. | 65 | Taka 5,250 million | Industrial & agri loan, etc. |
| 17. Dutch-Bangla Bank Ltd. | 8 | Taka 4,715 million | Industrial & agri loan, etc. |
| 18. Mercantile Bank Ltd. | 12 | Taka 4,300million | Industrial & agri loan, etc. |
| 19. Standard Bank Ltd. | 8 | Taka 1,739million | Industrial & agri loan, etc. |
| 20. One Bank Ltd. | 4 | Taka 2,200million | Industrial & agri loan, etc. |
| 21. EXIM Bank | 5 | Taka 2,600 million | Industrial loan, etc. |
| 22.Bangladesh Commerce Bank Ltd. | 24 | Taka 400 million | Industrial & agri loan, etc. |
| 23. Mutual Trust Bank Ltd. | 3 | Taka 700 million | Industrial & agri loan, etc. |
| 24.First Security Bank Ltd. | 4 | Taka 1,200million | Industrial & agri loan, etc. |
| 25. The Premier Bank Ltd. | 6 | Taka 1,500million | Industrial & agri loan, etc. |
| 26. Bank Asia Ltd. | 4 | Taka 625 million | Industrial loan, etc. |
| 27. The Trust Bank Ltd. | 10 | Taka 980 million | Industrial loan, etc. |
| 28. Shah Jalal Bank Limited (Based on Islamic Shariah) |
Foreign Banks
| 1. American Express Bank | 3 | Taka 7,080million | Industrial loan, etc. |
| 2. Standard Chartered Grindlays Bank | 6 | Taka 11,329 million | Industrial loan, etc. |
| 3. Habib Bank Ltd. | 2 | Taka 1,041million | Industrial loan, etc. |
| 4. State Bank Of India | 1 | Taka 805 million | Industrial loan, etc. |
| 5. Credit Agricole Indosuez (The Bank) | 2 | Taka 6,750 million | Industrial loan, etc. |
| 6. National Bank of Pakistan | 1 | Taka 165 million | Industrial loan, etc. |
| 7. Muslim Commercial Bank Ltd. | 2 | Taka 870 million | Industrial loan, etc. |
| 8. City Bank NA | 1 | Taka 2,447 million | Industrial loan, etc. |
| 9. Hanvit Bank Ltd. | 1 | Taka 368 million | Industrial loan, etc. |
| 10. HSBC Ltd. | 2 | Taka 2,400 million | Industrial loan, etc. |
| 11. Shamil Bank of Bahrain E.C. (Islami Banker) | 1 | Taka 1,000million | Industrial loan, etc. |
| 12. Standard Chartered Bank | 5 branches | Taka 10,961 million | TT free of charges, ATM, Money Link, Tele Banking, Electronic Banking |
Specialized /Development Banks
Out of the 5 specialized banks, 2(Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit need of the agricultural sector while the other two (Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) ) are for extending term loans to the industrial sector of Bangladesh.
| 1. Bangladesh Krishi Bank | 850 | Taka 29,890 million | Industrial & agri loan, etc. |
| 2.RajshahiKrishiUnnayan Bank | 301 | Taka 4,800 million | Industrial & agri loan, etc. |
| 3. Bangladesh Shilpa Bank | 15 | Taka 646 million | Industrial & agri loan, etc. |
| 4. Bangladesh Shilpa Rin Sangstha | 5 | Taka 150 million | Industrial & agri loan, etc. |
| 5.Bank of Small Industries & Commerce Bangladesh Ltd. | 25 | Taka 6,466 million | Small Industrial & agri loan, etc. |
Other
| 1. Ansar VDP Unnayan Bank | 100 | Taka 18 million | Small Industrial & agri loan, etc. |
| 2. Bangladesh Samabai Bank Ltd. (BSBL) | *** | Taka 22 million | Small Industrial & agri loan, etc. |
| 3. Grameen Bank | 1148 | Taka 5,655 million | Small Industrial & agri loan, etc. |
| 4.Karmasansthan Bank | 32 | Taka 18 million | Small Industrial & agri loan, etc |
The commercial banking system dominates the financial sector with limited role of Non-Bank Financial Institutions and the capital market. The Banking sector alone accounts for a substantial share of assets of the financial system. The banking system is dominated by the 4 State Owned Commercial Banks, which together controlled more than 30% of deposits and operates 3383 branches (50% of the total) as of June 30, 2008.
Chapter Five: – Non-Bank Financial Institutions (NBFIs)
Non-Bank Financial Institutions (NBFIs) play a significant role in meeting the diverse financial needs of various sectors of an economy and thus contribute to the economic development of the country as well as to the deepening of the country’s financial system. According to Goldsmith (1969), financial development in a country starts with the development of banking institutions. As the development process proceeds, NBFIs become prominent alongside the banking sector. Both can play significant roles in influencing and mobilizing savings for investment. Their involvement in the process generally makes them competitors as they try to cater to the same needs. However, they are also complementary to each other as each can develop its own niche, and thus may venture into an area where the other may not, which ultimately strengthens the financial mobility of both.
In relatively advanced economies there are different types of non-bank financial institutions namely insurance companies, finance companies, investment banks and those dealing with pension and mutual funds, though financial innovation is blurring the distinction between different institutions. In some countries financial institutions have adopted both banking and non-banking financial service packages to meet the changing requirements of the customers. In the Bangladesh context, NBFIs are those institutions that are licensed and controlled by the Financial Institutions Act of 1993 (FIA ’93).
NBFIs give loans and advances for industry, commerce, agriculture, housing and real estate, carry on underwriting or acquisition business or the investment and re-investment in shares, stocks, bonds, debentures or debenture stock or securities issued by the government or any local authority; carry on the business of hire purchase transactions including leasing of machinery or equipment, and use their capital to invest in companies.
The importance of NBFIs can be emphasized from the structure of the financial system. In the financial system of Bangladesh, commercial banks have emerged in a dominant role in mobilizing funds and using these resources for investment. Due to their structural limitations and rigidity of different regulations, banks could not expand their operations in all expected areas and were confined to a relatively limited sphere of financial services. Moreover, their efforts to meet long term financing with short term resources may result in asset-liability mismatch, which can create pressure on their financial base. They also could not broaden their operational horizon appreciably by offering new and innovative financial products. These drawbacks led to the emergence of NBFIs in Bangladesh for supporting industrialization and economic growth of the country.
The purpose of this paper is to highlight different features of NBFIs, their contribution to the overall economy and product base of NBFIs. The paper also describes the performance of NBFIs measured by different financial indicators, along with the effects of banks’ entry into the non-bank financing area. Special emphasis has been given to identify the challenges faced by NBFIs in Bangladesh.
Finally, development of NBFIs as well as their role in strengthening the financial system has been discussed. The analyses have been conducted on the basis of the secondary data obtained from different sources like NBFIs, Bangladesh Bank, Leasing Year Book etc.
5.1 Emergence of Non-Bank Financial Institutions in Bangladesh
Initially, NBFIs were incorporated in Bangladesh under the Companies Act, 1913 and were regulated by the provision relating to Non-Banking Institutions as contained in Chapter V of the Bangladesh Bank Order, 1972. But this regulatory framework was not adequate and NBFIs had the scope of carrying out their business in the line of banking. Later, Bangladesh Bank promulgated an order titled ‘Non Banking Financial Institutions Order, 1989’ to promote better regulation and also to remove the ambiguity relating to the permissible areas of operation of NBFIs. But the order did not cover the whole range of NBFI activities. It also did not mention anything about the statutory liquidity requirement to be maintained with the central bank. To remove the regulatory deficiency and also to define a wide range of activities to be covered by NBFIs, a new act titled ‘Financial Institution Act, 1993’ was enacted in 1993 (Barai et al. 1999). Industrial Promotion and Development Company (IPDC) was the first private sector NBFI in Bangladesh, which started its operation in 1981. Since then the number has been increasing and in December 2006 it reached 29. Out of these, one is government owned, 15 are local (private) and the other 13 are established under joint venture with foreign participation.
5.2 Recent Development and Activities of NBFIs
The major business of most NBFIs in Bangladesh is leasing, though some are also diversifying into other lines of business like term lending, housing finance, merchant banking, equity financing, venture capital financing etc. Lease financing, term lending and housing finance constituted 94 percent of the total financing activities of all NBFIs up to June 2006. A break-up of their financing activities reveals that the shares of leasing and housing finance in the total investment portfolio of
NBFIs have gradually decreased from 59 and 15 percent, respectively, in 2002 to 46 and 14 percent in June 2006. The share of term loans, on the other hand, has increased from 20 percent to 34 percent during the same period implying increased focus on the former. The evolvement of NBFI business activity is observed in Figure 1. It can also be seen from the figure that the portfolio mix of NBFIs has become quite stable from 2004.
Figure 1: Overview of financing provided by NBFIs in different sector
Source: Authors’ calculation from data provided by Financial Institution Department, Bangladesh Bank.
NBFIs offer services to various sectors such as textile, chemicals, services, pharmaceuticals, transport, food and beverage, leather products, construction and engineering etc. The percentage of the sector wise distribution of NBFIs investment in 2005 is given in Figure 2. Although an individual NBFI may have a different portfolio as per its business strategy, the aggregated data shows that NBFIs mainly focus on real estate & housing (13%), power & energy (12%), textile (11%) and transport sector (9%).
Service (finance and business) is another area of importance for NBFIs. From the perspective of broad economic sectors, investment in the industrial sector (42%) dominated that in the service sector (33%) in 2005. NBFIs are also exploring other sectors namely ‘pharmaceuticals & chemicals’, ‘iron, steel & engineering’, ‘garments & accessories’, ‘food & beverage’ and ‘agro industries & equipment’. The weight of these sectors is 23 percent of the total portfolio.
Source: BLFCA Year Book-2007
5.3 Products and Services Offered by NBFIs
Non-Bank Financial Institutions play a key role in fulfilling the gap of financial services that are not generally provided by the banking sector. The competition among NBFIs is increasing over the years, which is forcing them to diversify to a wider range of products and services and to provide innovative investment solutions. NBFIs appear to offer flexible options and highly competitive products to help customers meet their operational and financial goals. The table below provides a summary of the product range offered by existing NBFIs of Bangladesh.
| Type of Activity | Key Features | Target Market |
| Lease Financing |
??Finance/ Capital
Lease
??Operational
Lease
??Hire Purchase
??Leveraged
Leases
??Synthetic Leases
??Sale/LeasebacksProvide a long-term solution that allows customers to free up working capital
An operational lease entails the client renting an asset over a time period that is substantially less than the asset’s economic life. It offers short-term flexibility, which may allow the customer to take advantage of off-balance sheet accounting treatment.
A hire purchase is an alternative to a lending transaction for the equipment purchase. It is usually employed for retail or individual financing of smaller items, such as consumer products. However, hire purchase option is also suitable for business houses depending on tax practices.
Leases generally for large transactions involving three parties: a lessee, a lessor and a funding source. These leases infuse third-party non-recourse debt underwritten by the customer’s ability to raise capital in the public and private capital markets for a significant portion of the cost.
Synthetic lease structure is generally provided for property that retains value over an extended period of time such as aircraft, railroad rolling stock, manufacturing equipment and certain types of real estate.
Ideal for customers looking to generate liquidity from their existing equipment and reinvest the proceeds back into the business.Corporate, SMEs, Individual business enterprises.
Corporate, SMEs, individual business enterprises.
Clients that have an established credit history with the institution can manage the down payment and assume a stake in the leasing agreement.
Mostly corporate houses
Mostly corporate houses
Corporate, SMEs, individual
business enterprisesHome Loan and
Real Estate
FinancingHouse loan and real estate financing is extended for purchase of apartment and house, construction of residential house, purchase of chamber and office space for professionals, purchase of office space and display center, purchase and construction of commercial building, real estate developer for construction of apartment project. Mostly mid to long term in nature.Individuals, Professionals, &
Corporate BodiesShort Term Loans
??Factoring of
Accounts
Receivables
??Work Order
FinancingFinancing against invoices raised by the supplier after making the delivery successfully. Major Features are Revolving Short Term Facility, Permanent Assignment of Payment, Financing against invoices, Post-delivery Financing
Finance against the assignment of bill arising out of work orders on a revolving basis. The company shall take assignment of suitable work orders and / or invoices and finance the client against those.Small and medium size companies having regular supplies to corporate bodies
Medium and large clients with continuous flow of work orders from customersCorporate Finance
??Bridge Finance
??Syndication of
Large Loans
??Advisory
Services
??Merger and
Acquisition
??SecuritisationBridge Finance is a kind of Short Term Finance extended in anticipation of immediate long term financing such as public issue, private placement, loan syndication, lease syndication, loan, lease & debenture.
Making available a large financing for a corporate client. Arrange syndicated financing in the mode of loan, lease, equity, working capital, or any combination thereof. Particularly useful for large projects requiring large scale investment and no single financier wants to take the whole risk. Example: Greenfield project.
Advisory services are comprehensive financial, economic and strategic advice to companies for growth, profitability, and sustainability. This includes providing wide range of services, such as corporate counseling, project counseling, capital restructuring, financial engineering, diagnosing financial problems.
Help find appropriate organization for best possible synergy, conduct valuation of companies and select suitable merger and acquisition methods, negotiate and execute deal beneficial for all the parties involved.
Securitisation is the issuance of financial instruments backed by assets and/or cash flows. This is one of the modern financial services, which solves specific type of financial needs of business organizations.Company going for an IPO or expecting to avail a long term loan or Working Capital within one year or so.
Financing new large project; Financing BMRE (Balancing, Modernization, Replacement and Expansion); Refinancing a large project.
All large corporate houses
Medium and large corporate
bodies
All corporate bodiesMerchant Banking
??Issue
Management
??Underwriting
??Portfolio
Management
??Corporate
AdvisingThe Issue Management group is capable of devising innovative solution for raising capital – debt e.g. placement of bonds and debentures, and raising equity through private and public placement – from the market suiting the unique needs and constraints of the corporate clients.
Underwriting refers to the guarantee by the underwriters that in the event of under-subscription, the underwriter will take up the under-subscribed amount on pro-rata basis upon payment of price of that option
Merchant banks allow small investors to open investor account with merchant banks and provide support for the purchase and sales of shares. Clients shall have absolute discretionary power to make investment decisions.
Through corporate advising, the merchant bank helps the issuer analyze its financing needs and suggest various ways to raise needed funds.All corporate bodies
All corporate bodies
Individuals, Professionals, &
Corporate Bodies
All corporate bodiesSecurities Services
??Brokerage
Services
??CDBL Services
as full service
Depository
Participant (DP)Provide services for Trade Execution (Dhaka and Chittagong Stock Exchanges), Pre -IPO private placement, Asset allocation advice, Opportunities for trading in different financial instruments.
Apart from the brokerage services, securities services also provide the services like BO (Beneficial Owner) accounts opening and maintenance, Dematerialization, Re-materialization, Transfers and multiple accounts movement, Lending and borrowing etc.All corporate bodies
Individuals, Professionals, &
Corporate Bodies
5.4 Challenging Issues for NBFIs
(a) Sources of Funds
NBFIs collect funds from a wide range of sources including financial instruments, loans from banks, financial institutions, insurance companies and international agencies as well as deposits from institutions and the public. Line of credit from banks constitutes the major portion of total funds for NBFIs. Deposit from public is another important source of fund for NBFIs, which has been increasing over the years. NBFIs are allowed to take deposits directly from the public as well as institutions. According to the central bank regulation, NBFIs has the restriction to collect public deposits for less than one year, which creates uneven competition with banks as banks are also exploring the business opportunities created by NBFIs with their lower cost of fund.
(b) Cost of Fund
The structure of cost of fund for NBFIs does not follow any unique trend. Banerjee and Mamun (2003) showed that weighted average cost of fund for the leasing companies is always positioned much higher than that of banks. According to their study, cost of funds for leasing companies varied between 8.4 to 15.3 percent while that of banks was between 8.5 to 9.5 percent. Choudhury (2001) mentioned that about 15 percent of the deposit of the banking sector was reported to be demand deposits, which are interest free while 35 percent constituted low cost saving deposits having an average of 4 to 5 percent interest rate and the rest were fixed deposits bearing an average of 9 percent
(c) Asset-