Report On

Growth of Non-Bank Financial Institutions in Bangladesh

Discussion Area

Management of Financial Institutions

P R E P A R E D
F O R :
Mr. Jahangir Alam Chowdhury
Professor and M.B.A Director
Department of Finance
University of Dhaka

P R E P A R E D
B Y :
Fakrul Islam
(M.B.A 15th Batch)
Roll No: 14-146
Department Of Finance
Faculty of Business Studies
UNIVERSITY OF DHAKA
D A T E
O F
S U B M I S S I O N :
1 6 T H F E B R U A R Y ,
2 0 1 4

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I am

FAKRUL ISLAM

14-146

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Letter of transmittal
16th February, 2014
Mr. Jahangir Alam Chowdhury
Professor and M.B.A Director
Department of Finance
University of Dhaka
Sir,
It is my immense pleasure to submit my class report as you asked us to prepare and
submit as a requirement of course Management of Financial Institutions (F-501)
on Growth of Non-Bank Financial Institutions in Bangladesh".
I have tried my best to compile the pertinent information as comprehensively as
possible and if you need any further information, I will be obliged to assist you.
Thanking you,
Fakrul Islam
Roll No. 14-146
MBA 15th batch
Department of Finance
University of Dhaka.

Table of Contents

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No.

Contents

Page No

01

Executive Summary

05

02

Introduction of Bangladeshs Economy

06

03

Overview of Financial Market in Bangladesh

09

04

General Concept of NBFIs in Bangladesh

09

05

List of NBFIs in Bangladesh

10

06

Statistics Regarding NBFIs in Bangladesh

15

07

Conclusion

21

Executive summary

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Financial institutions have traditionally been the major source of long-term funds for
the economy in line with the development objective of the state. A wide variety of
financial institutions (FIs) emerged over the years. While most of them extend direct
finance, some also extend indirect finance and still some others extend largely
refinance. FIs can be broadly categorized as nature of their operations.
Non-Bank Financial Institutions (NBFIs) in Bangladesh are gaining increased
popularity in recent times. Though the major business of most NBFIs is leasing some
are also diversifying into other lines of business like term lending, housing finance,
merchant banking, equity financing and venture capital financing. The purpose of
this paper is to highlight different features of NBFIs, their contribution to the overall
economy and the product base of NBFIs. The paper also describes the performance
of NBFIs as measured by different financial instruments.
The paper describes Porter 5 factors for financial institutions in Bangladesh. Here I
discussed how the NBFI will sustain by competing with various factors. Then the
paper illustrates the asset, liability composition of NBFI. After that I discussed
Profitability ratios for NBFI in Bangladesh. Then, I discussed the Asset quality of NBFI
and decision of stress testing where we see most of the NBFIs are in satisfactory
level except eight NBFI.

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INTRODUCTION
Bangladesh economy continues to prove significant resilience from its birth. On the
basis of emergent macroeconomic indications, GDP growth rate is expected to be
7.2 percent in the calendar year 2013-14. In the latest budget of our country GDP is
estimated to be 6.03% (Assumed by ADB 5.7% and IMF 5.8% but though it was
expected as more than 7% in the calendar year 2012-2013. The failure to catch the
target is affected less by the slowdown in international trade than other emergent
economies (especially Asian countries) and has sustained solid financial & economic
fundamentals. Rather the situation is mainly characterized by the political turmoil in
our country.

GDP & GROWTH RATE

The Gross Domestic Product (GDP) in Bangladesh increased by 6.030 percent in the
calendar year 2012-13 over the previous calendar year. The GDP Growth Rate in our
country is continuously achieving five percentile points to six percentile points.
Historically, until 2012, Bangladesh GDP Growth Rate is an average of 5.6 Percent
which was all-time high at 6.7% in June of 2011 and an all-time low of 4.1% in June
of 1994. Bangladesh is well-thought-out to be as an emergent economy. Yet, nearly
one-third of people here (About 150 million) live in extreme poverty. In the last
decade our country developed due to growth of remittance, microcredit and
garment industry. Still the main problems to justifiable improvement in Bangladesh
are overpopulation, poor infrastructure, corruption, political instability and a slow
implementation of economic reforms.
Amount in Crore taka
Source: Statistics Department, Bangladesh Bank and EPB
477,382

2012-13

433,720
448,839

2011-12

409,053
420,096

2010-11

385,050
394,420

2009-10

360,845
371,130

2008-09
-

340,197
100,000

200,000

300,000

GDP at Constant Market Price

400,000

500,000

600,000

Gross National Income

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2012-13

6.359%

6.030%

2011-12

6.842%

6.234%

6.510%

2010-11
2009-10

6.069%

2008-09

5.741%

6.708%

6.275%

5.962%

5.000% 5.200% 5.400% 5.600% 5.800% 6.000% 6.200% 6.400% 6.600% 6.800% 7.000%

GDP at Constant Market Price

Gross National Income

Source: Statistics Department, Bangladesh Bank and EPB

Inflation Rate
The inflation rate in Bangladesh was documented at 9.22 percent in the calendar
year 2012-13. This inflation Rate in Bangladesh is periodically conveyed by the
Bangladesh Bureau of Statistics. Historically, average inflation rate in Bangladesh is
about 6.57 Percent. This inflation rate reached at the highest ever point at 12.71
Percent in December of 1998 and it got at a record lowest point of -0.02 Percent in
December 1996.
Source: Statistics Department, Bangladesh Bank and EPB
12

6
4
2

10.62

9.94

10
87.06
4.38
2.79

1.94

5.83 6.48

7.16

7.2

6.66 7.31

8.8

9.22

2.79

Bangladesh Inflation Rate

Money supply
In recent years an increasing tendency in broad money is observed except FY200607. Though the overall development of broad money position is inconsistent, but the
total amount amplified in the successive years under study period. During FY 201213, total broad money in our economy has increased to 619,901.03 crore Taka from
517,109.50 crore taka of FY 2011-12.

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700,000.00

619,901.03

600,000.00
500,000.00
400,000.00
300,000.00
200,000.00
100,000.00
0.00

M3

M2

M1

Inflation Rate

Source: Statistics Department, Bangladesh Bank and EPB

Stock Market & General Index

From FY 2008-09 to FY 2009-10 our stock market experienced an immense growth
which actually started from FY 2005-06. Between these years our general index
jumped from 1339 to 6153 in 2019-10. Later market fell drastically for various
reasons. As of April 2013 our general index has come down to 3707.
7000.00
6000.00
5000.00
4000.00
3000.00
2000.00
1000.00
0.00

General Index

Source: Statistics Department, Bangladesh Bank and EPB

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Overview of Financial market of Bangladesh

Money Market

Financial
market of
Bangladesh

Foreign Exchange
Market

Capital market

Source: Statistics Department, Bangladesh Bank and EPB

The formal financial market in our country is consisted of three individual
departments. The money market comprised of banks, FIs and primary dealers as
intermediaries and savings & lending instruments, treasury bills as instruments. The
capital market is institutionalized by two (02) stock exchanges-Dhaka Stock
Exchange and Chittagong Stock Exchange. The foreign exchange market is a bit
unstructured. Different specialized companies along with Banks and financial
institutions carry on the foreign exchange activities under the existing regulations.

Non-Bank Financial Institutions (NBFIs) in our country

As per Bangladesh Bank Non-bank Financial Institutions are financial
intermediaries that accumulate funds by borrowing from the general public and lend
the same to meet specialized financing needs, but are prohibited to accept such
deposits payable either on demand or by cheque, draft, etc. and operate checking
accounts for which their liabilities are not a part of the money supply.
In the beginning, NBFIs were introduced in our financial system under the
Companies Act, 1913 and were regulated by the provision relating to Non-Banking
Institutions as restricted in Chapter V of the Bangladesh Bank Order, 1972. But
subsequently, this regulatory structure was not adequate for its growth as these

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NBFIs had the opportunity to carry out the businesses in the same line as of
banking. Then, Bangladesh Bank circulated an order titled Non-Banking Financial
Institutions Order, 1989 to confirm enhanced regulation bylaw and at the same
time the Bangladesh Bank also initiated this law to eradicate the ambiguity
regarding the acceptable areas of business for NBFIs. But unfortunately this was not
enough to satisfy the NBFI institutions as it did not cover the comprehensive variety
of NBFI activities. The order (Non-Banking Financial Institutions Order, 1989) also
did not refer anything clearly about the statutory liquidity obligation thats to be
maintained with the central bank.
Later, in order to eliminate the previous regulatory insufficiency a new act titled
Financial Institution Act, 1993 was passed in 1993. The act also clearly defines a
broad range of activities to be covered by NBFIs. Industrial Promotion and
Development Company (IPDC) was the first NBFI in Bangladesh, which commenced
its process in 1981. Since then, the quantity of NBFI has been growing and as of July
2013 it touched at 31.
Currently, in our country the operations of NBFIs are controlled and regulated by the
Bangladesh Bank. The authority to involve in borrowing from the general public
usually depends on some factors as minimum capital requirement, excellence of
management, obedience with the concerned and related laws, rules and regulations
and steadiness of respective financial standing. NBFIs may award loans to their
clients and the general public up to a certain amount or proportion and may also
participate in trust functions with specific earlier consent of the central bank. The
NBFIs are not permitted to participate in foreign exchange transactions under the
pre stated laws and orders.

List of Non-Bank Financial Institutions in Bangladesh

As of January 2014, 31 FIs are operating in Bangladesh while the maiden one
(Industrial Promotion and Development Company) was established in 1981. Among
the total NBFIs, two numbers of NBFIs are fully government owned, one is the
subsidiary of a SOCB, 13 (thirteen) numbers of NBFIs were initiated by private
domestic initiative and 15 (Fifteen) numbers of NBFIs were initiated by joint venture
initiative. The comprehensive list of the Non-Bank Financial Institutions in
Bangladesh is given below:
1. Bangladesh Finance and Investment Co. Ltd.:
Bangladesh Finance and Investment Company Limited (BFICL) a non-banking
finance company incorporated in Bangladesh on 10 May 1999 as a public limited
company. It began business on 15 February 2000. Its authorized and paid up capital
are Tk 500 million and Tk 23 million respectively. The capital is divided into ordinary
shares of Tk 100 each.

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2. Bangladesh Industrial Finance Company Limited (BIFC):

Bangladesh Industrial Finance Company Limited (BIFC) is a joint venture Leasing
and Financing Company, promoted by a group of Foreign and Local Sponsors.
3. Bay Leasing and Investment Limited:
Bay Leasing and Investment Limited (BLIL), a second generation NBFI (Non-Banking
Financial Institution) was incorporated in 7 February 1996 sponsored by a group of
prominent industrialists, businessmen and professionals.

4. Delta Brac Housing Finance Corporation Ltd. (DBH):

Delta Brac Housing Finance Corporation Ltd. (DBH) is the pioneer, largest and
specialist in Housing Finance institution in the private sector of the country. After
commencing operation in the early 1997, the company has, registered
commendable growth in creating home ownership among more than 23,000
families in Dhaka and other major cities of the country.
5. Fareast Finance and Investment Limited:
Fareast Finance & Investment Limited-a leasing and financing company started its
business in the early 2002 to serve its clients with high ethical standards and
accountability. Fareast believes that each of its activities must provide satisfaction
to its customers and will start progress for them.
6. FAS Finance and Investment Limited:
FAS Finance and Investment Limited having its registered and operational office is
located at Uttara Bank Vaban (5th Floor), 90 Motijheel B/A, Dhaka-1000,
Bangladesh. This was incorporated in Bangladesh as a private limited company on
September 27, 2001 and the company was subsequently converted into public
limited company under the Companies Act, 1994. The company obtained license
from Bangladesh Bank under the Financial Institutions Act, 1993.
7. First Lease Finance and Investment Ltd.:
First Lease Finance and Investment Limited (FLFIL), having its registered and
operational office is located at Jahangir Tower (3rd Floor), 10 Kawran Bazar C/A,
Dhaka-1215, Bangladesh. This was incorporated in Bangladesh as a private limited
company on June 28, 1993 and the company was subsequently converted into
public limited company under the Companies Act, 1994. The company obtained
license from Bangladesh Bank under the Financial Institutions Act, 1993 on October
05, 1999. The Company provides lease finance for machinery, equipment,
transport, housing etc for both industrial and commercial purposes.
8. GSP Finance Company (Bangladesh) Limited (GSPB):

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GSP Finance Company (Bangladesh) Limited (GSPB), having its registered and
operational office is located at 1/C Paribag, Mymansingh Road, Ramna, Dhaka-1205,
Bangladesh. The company was incorporated in Bangladesh as a private limited
company on April 17, 1996. The company obtained license from Bangladesh Bank
under the Financial Institutions Act, 1993.
9. Hajj Finance:
Hajj Finance Company Limited, having its registered and operational office is located
at Fajlur Rahman Centre (8th Floor), 72, Dilkusha Commercial Area, Dhaka-1000,
Bangladesh. The company was incorporated in Bangladesh as a private limited
company on July 02, 2007. The company obtained license from Bangladesh Bank
under the Financial Institutions Act, 1993.
10. IDLC Finance Limited:
IDLC Finance Limited is a multiproduct financial institution, established in 1985 with
the collaboration of reputed international development agencies like Korean
Development Leasing Corporation (KDLC), South Korea. The primary goal of IDLC
was to help modernize the financial services industry, by introducing modern modes
of financing hitherto unknown to Bangladesh. This, we set about to do, by
pioneering the launch of a multitude of financial products and services.
11.
Industrial and Infrastructure Development Finance Company
(IIDFC) Limited:
Industrial and Infrastructure Development Finance Company Limited (IIDFCL) was
incorporated in Bangladesh on December 19, 2000 as a public limited company. The
Company was licensed under Financial Institution Act, 1993 by Bangladesh Bank on
January 23, 2001 and started operation from May 2001. The registered office of the
Company is situated as Chamber Building (6th Floor), 122-124, Motijheel C/A, Dhaka
1000, Bangladesh.
12.Industrial Promotion and Development Company of Bangladesh
Limited(IPDC):
IPDC is the first private sector Financial Institution in Bangladesh established in
1981 by a distinguished multilateral team of shareholders.
13.Infrastructure Development Company Limited (IDCOL):
Infrastructure Development Company Limited (IDCOL) was established on 14 May
1997 by the Government of Bangladesh (GOB). The Company was licensed by
Bangladesh Bank as a non-bank financial institution (NBFI) on 5 January 1998. Since
its inception, IDCOL is playing a major role in bridging the financing gap for
developing medium and large-scale infrastructure and renewable energy projects in
Bangladesh. The company now stands as the market leader in private sector energy
and infrastructure financing in Bangladesh.

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14.International Leasing and Financial Services Limited:

International Leasing And Financial Services Limited (International Leasing), a multi
product joint venture financial institution has been established with the purpose of
assisting the productive enterprises in Bangladesh through the provision of lease
financing and related financial services for development of the industrial, energy,
agricultural, transport, construction, telecommunication, power, medical,
commercial and professional sectors.
15.Islamic Finance and Investment Limited:
IFIL is a public limited company within the meaning of clause of section 2(1) of
companies act, 1994 in Bangladesh fully owned by Bangladeshi nationals.
16.Lanka Bangla Finance Ltd.:
Lanka Bangla Finance Limited (LBFL) a joint venture financial institution established
with multinational collaboration is in operation since 1997 having license from
Bangladesh Bank under Financial Institutions Act, 1993. With institutional
shareholding structure, educated & motivated human resources, friendly working
environment & dynamic corporate culture has enabled LBFL to be a diversified
financial services providing institution of the country. Technical support provided by
Sampath Bank Limited, Sri Lanka has been working as a catalyst to emerge LBFL as
most innovative financial solution provider strictly in compliance with the rules &
regulations of Bangladesh Bank.
17.MIDAS Financing Limited (MFL):
MIDAS FINANCING LIMITED (MFL) is leading financial institution of the country
licensed by Bangladesh Bank under the financial institutions Act 1993. MFL Housing
Loan Scheme has been launched to fulfill the dream of the limited income people by
extending financial support in the form of term loan for constructing a house and/or
purchasing an apartment/readymade house/commercial space.
18.National Finance Limited:
National Finance Company Limited, having its registered and operational office is
located at Unique Trade Centre (UTC), Level-10, 8 Panthapath, Dhaka-1215. The
company was incorporated in Bangladesh as a private limited company on March
03, 2003. The company obtained license from Bangladesh Bank under the Financial
Institutions Act, 1993.
19.National Housing Finance and Investments Limited:
National Housing Finance And Investments Limited (NHFIL) is a unique Loans and
Savings institution operating in our country. It is a Public Limited Company under
the Companies Act, 1994 and licensed by Bangladesh Bank under the Financial
Institutions Act, 1993. We were incorporated in August 18, 1998 with authorized

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capital Tk. 2000 million paid up capital of Tk. 400 million. Our finance includes
Housing finance, Lease finance, Deposit scheme, Car Loan.
20.Peoples Leasing and Financial Services Ltd:
Peoples Leasing and Financial Services Limited (PLFS) is a financial institution
established within the ambit of Financial Institutions Act-1993 and was incorporated
as a Public Limited Company under Companies Act-1994 on August 12, 1996.
Company obtained license from Bangladesh Bank on November 24, 1997 to carry
on lease finance business. Authorized Capital of the Company is Tk. 500 million
divided into 5 million ordinary shares of Tk. 100/- each while Paid-up Capital as on
September 30, 2004 stands at Tk. 130 million subscribed by the sponsors.
21.Phoenix Finance and Investments Limited:
Phoenix Finance & Investments Limited (Former Phoenix Leasing Company Limited),
one of the leading and reliable multi products Financial Institution in Bangladesh
was incorporated in Bangladesh on April 19,1995 as Public Limited Company under
the Companies Act 1994 and started its operation on May 9 1995 as a Non Banking
Financial Institution under Financial Institution Act 1993 , it has changed its name to
Phoenix Finance & Investment Limited (PFIL) with a view to reflecting multidimensional financial activities the company has been doing other than Lease
Financing which although , has remained as the prime area of the financial
activities.
22.Premier Leasing and Finance Limited:
Premier Leasing & Finance Limited, a third generation financial institution, was
registered on September 26, 2001 as a Public Limited Company as Premier Leasing
International Limited with authorized capital of TK.400 Million and initial paid-up
capital of TK.51 Million. The Company went for public subscription by floating its
shares in the capital market in July 2005. Companys issued and fully paid-up capital
as on December 31, 2008 stood at TK.344 Million.
23.Prime Finance and Investment Ltd:
Prime Finance is one of the leading financial institutions operating in Bangladesh.
Our core competencies cover lease finance, term finance.
24.Reliance Finance
Reliance Finance Limited (REFL), began its journey in March 1996 as a Public Limited
Company under license from Bangladesh Bank to provide innovative financial
services. Since inception, REFL Company has been rendering prompt and cost
effective financial services with distinctive customer service. The Company has
diversified its business and the growth has been steady and satisfactory. Reliance
Finance Limited (REFL), began its journey in March 1996 as a Public Limited
Company under license from Bangladesh Bank to provide innovative financial
services. Since inception, REFL company has been rendering prompt and cost

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effective financial services with distinctive customer service. The Company has
diversified its business and the growth has been steady and satisfactory.
25.Saudi-Bangladesh Industrial and Agricultural Investment Company
Limited (SABINCO):
Saudi Bangladesh Industrial and Agricultural Investment Company Limited,
popularly known by its acronym SABINCO, is a joint venture Industrial Finance and
Investment Company owned by the Governments of Saudi Arabia and Bangladesh.
It was incorporated under the Bangladesh Companies Act 1913 on 24th June 1984
with its headquarter in Dhaka. The company commenced operation in 1986. In
1993 Bangladesh Bank granted license to operate it as a Non-Banking Financial
Institutions.
26.The UAE-Bangladesh Investment Co. Ltd:
UAE Bangladesh Investment Company Limited a private limited company
incorporated in Bangladesh under the Companies Act 1913 on 11 June 1987 with a
desire to consolidate the joint efforts of the government of Bangladesh and United
Arab Emirates to promote economic co-operation between them. To this effect, a
contract was signed on 8 November 1986 between the governments of Bangladesh
and Abu Dhabi Fund for (Economic) Development.
27.Union Capital Limited:
UNION CAPITAL LIMITED is one of the largest investment banks and fastest growing
financial institutions in Bangladesh. Previously, it was known as Peregrine
Bangladesh which had its origins and businesses rooted in Hong Kong. Out of the
local office of the erstwhile Peregrine Capital Limited of Hong Kong, Union Capital
Limited, Dhaka emerged in early 1998 as a Bangladesh-based company led by a
group of the foremost entrepreneurs of the country. Union Capital, within a short
span of time, has proved its worth as a most forward-working vigorous organization
achieving success with its wide international network and strong local base.
28.United Leasing Company Limited (ULCL):
ULC was established in 1989 as a public limited company, to cater the investment
needs of our economy.
29.Uttara Finance and Investments Limited:
Uttara Finance and Investments Limited have been operating as Financial Institution
since 7 May 1995 under license from Bangladesh Bank (Central Bank). The company
extends lease, loans and asset management services. The companys clientele base
is from SME to large corporate houses. The company also accepts Term Deposits
from individuals and corporate bodies.
30.Agrani SME Financing Company Limited:

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Agrani SME Financing company Limited is a completely government owned

company. This company gets their license 31 January, 2011 from Bangladesh Bank.
This FI is not started their operation yet. This FIs main business purpose is to give
SME loan.

31.Bangladesh Infrastructure Finance Fund Limited:

Bangladesh Infrastructure Finance Fund Limited Company is Government owned
company. This company gets license from Bangladesh Bank 16 October, 2011. This
FI is not started their operation yet.

Statistics regarding Financial Institutions in our country

Among the 31 NBFIs, twenty three companies are listed in the Dhaka Stock
Exchange. The listed companies are Bay Leasing & Investment Limited, Bangladesh
Finance and Investment Co. Ltd, Bangladesh Industrial Financial Company Ltd,
Delta Brac Housing Finance Corporation Ltd, Fareast Finance & Investment Limited,
FAS Finance & Investment Limited, First Lease Finance and Investment Ltd., GSP
Finance Company (Bangladesh) Limited, ICB, IDLC Finance Ltd., International
Leasing & Financial Services Limited, Industrial Promotion & Development Company
of Bangladesh Ltd, Islamic Finance & Investment Ltd, LankaBangla Finance ltd,
MIDAS Financing Ltd, National Housing Finance and Investment Ltd, Phoenix Finance
and Investments Ltd, Peoples Leasing and Fin. Services Ltd, Premier Leasing &
Finance Limited, Prime Finance & Investment Ltd, United Leasing, Union Capital
Limited, Uttara Finance and Investments Limited. The sectorial data for the financial
institutions sector in the following section has been collected and analyzed based
on these listed company data.
Source: Stock Bangladesh Limited
Sector:
Financial Institutions
Sector PE:

24.29

Sector Cap

BDT 153,932,941,575

Sector Earnings:

BDT 6,336,410,668

Sector Beta:

0.9125

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Sector Earning

6.34
21.81
153.93

Sector Cap

P/E Ratio
0

421.46
24.29
19.32
50

100

150

Bank

200

250

300

350

400

450

Financial Institutions

Source: Stock Bangladesh Limited

Amount in BDT Billion (except ratios)
In the comparison section Ive compared the obtained data of the financial
institutions sector with the Banking sector of our country. Banking industry is closely
related with the financial institutions industry and it may be comparable to the
banking industry as these two are comparatively same in terms of basic features.
The P/E ratio for the financial institutions sector is 24.29 against the P/E ratio of
19.32 from the banking sector
If we compare the sector capital of these two
industry we can see that the capital of the banking industry is significantly higher
than that of financial institutions. Because, there are more players in the banking
industry than there are in the financial institutions industry. On the other hand the
quality and strength of the players in the banking industry is significantly higher
than the NBFIs. So, altogether banks play the major role in our financial market. This
rationale is also reflected in the sector earning of these two industries. Her, it is
obvious that the earnings of the banking industry is significantly higher than the
financial institutions industry.

Porter 5 factor Analysis

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Porter 5 factors for financial institutions in Bangladesh

Financial Institutions: Industry status : Matured
High/lo
factors
Reasons
w
Competing in a matured and vast market
Competition with rivals
High
but have to deal within market niche.
Cost of fund is relatively high than the
Threat of new entrants
Low
banks.
Different institutions like banks are
Threat of substitute
High
providing almost indistinguishable services
& products.
Switching cost is low. There are numerous
alternative sources are available. And
Bargaining power of
High
clients are not controllable. Rather they may
buyers
switch to any product or service as they
chose so.
Suppliers of funds are comparatively
Bargaining power of
insignificant in numbers other than public
High
suppliers
investors. As regulation binds the company
to take

Asset composition of NBFIs of Bangladesh

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Other investments

13.6
13.7
13.6

2.4
Investment in government securities 3
3.1
CY2010

CY2011

CY2012 192.6
134.8
109.2

Term finance
54.8
65.1
59.8

Lease finance
0

50

100

150

200

250

Amount in BDT billion

Source: Statistics Department, Bangladesh Bank
It is clear from the above chart that in case of NBFI the major portion of assets
comes from the lease and loan portfolio. Other investments and investments in
government securities play a negligible part in the asset mix. It is also clear that the
term finance is playing the major role in its asset mix. And gradually the percentage
of term finance in the portfolio of NBFI is getting preferred. Within last three
calendar year term finance has increased by almost 80% and it is mostly influencing
the total asset portfolio.
CY2012

326.6

CY2011

276.4

CY2010
0

243.6
50

100

150

200

250

300

350

Total assets

Amount in BDT billion

Source: Statistics Department, Bangladesh Bank

Liability composition of NBFIs of Bangladesh

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59.6
CY2012

267
145.2
57.3

CY2011

219.1
116.4
42.6

CY2010

201
99.8

50

100

150

Deposits

200

250

300

Total liabilities

Shareholders equity (Capital)

Amount in BDT billion

Source: Statistics Department, Bangladesh Bank
From the liability composition of the NBFIs in our country it can be summarized that
the portion of liability is more influential than the equity portion. The institutions in
this field try to utilize its debt capacity. But as currently according to Bangladesh
bank guidelines there are restriction to provide loan in terms of equity. Single party
or single group exposure cant be more than 30% of respective equity. So, most of
the companies are trying to increase its equity base so that they will be able to
extend the loan limit. Another important part is that the deposit plays a moderate
role in the capital of NBFIs. For banks deposit plays the most important role. This is
because, according to existing rule NBFIs cant take current or savings deposits
from individual. So, the cost of fund for the NBFIs is significantly higher than banks.
This actually creates an uneven field of competition as NBFIs have to compete with
banks. Recently NBFIs have got approval for taking DPS for three months. This may
reduce the cost of fund a bit lower. But still the level playing field must be formed.
CY2012

CY2011

547.99%

482.37%

CY2010

571.83%

420.00% 440.00% 460.00% 480.00% 500.00% 520.00% 540.00% 560.00% 580.00%

Debt to equity ratio

Source: Statistics Department, Bangladesh Bank

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From the liability composition of the NBFIs in our country it can be summarized that
the portion of liability is more influential than the equity portion. Debt to equity ratio
is very high for this industry.

Profitability ratios for NBFIs of Bangladesh

3.90%
CY2012

10.20%
1.90%
4.30%

CY2011

12.10%
2.50%
4.30%

CY2010

14.40%
2.50%

0.00%

2.00%

4.00%

6.00%

Return on Assets (ROA)

8.00%

10.00%

Return on Equity (ROE)

12.00%

14.00%

16.00%

Net Interest Margin (NIM)

Source: Statistics Department, Bangladesh Bank

All the profitability ratios are showing downward trend in the last three calendar
years. Return on Assets (ROA), Return on Equity (ROE), Net Interest Margin (NIM)
etc. profitability ratios dropped over this period. This actually happened due to
recent economic downturn, stock market collapse, political turbulence etc.
3.00%

CY2012
11.00%

6.80%

CY2011

10.90%
6.10%

CY2010
0.00%

9.70%
2.00%

4.00%

6.00%

Cost of Deposits & Borrowings

8.00%

10.00%

12.00%

Average Spread

Source: Statistics Department, Bangladesh Bank

A very high cost of fund resulting into a very low spread is another cause for this
negative movement. Here, the average cost of fund is around 10% to 11% whereas
the cost of fund for the banks is much lower than this rate. Besides this, previously
there was no restriction over the spread managed by these institutions. But as

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recently, some restrictions have been imposed on the spread, the average spread
for financial institutions have dropped sharply.

Asset quality for NBFIs of Bangladesh

56.30%
CY2012

12.50%
22.10%
67.50%

CY2011

12.20%
18.00%
65.70%

CY2010

16.30%
24.80%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

Classified Loans & Leases to Capital

Loan Loss Provisions to Capital
Loan Loss Provisions to Classified Loans & Leases

Source: Statistics Department, Bangladesh Bank

From the above graphs it can be implied that the asset quality of the NBFI industry
of our country is not up to mark. Here, the classified loan ratio is comparatively
high. This high NPL ratio is killing up a major portion of profit as the companies have
to keep certain pre-guided amount of provisions against these classified loans. The
amount of provision varies with different classified loan types. But it may be
mentioned that though the overall NPL ratio is high it may be lower for some
prominent companies.
19.00%
CY2012
19.40%

20.70%
CY2011
18.30%
17.00%

17.50%

18.00%

18.50%

19.00%

Capital to Risk-Weighted Assets

19.50%

20.00%

20.50%

21.00%

Capital to Total Assets

Source: Statistics Department, Bangladesh Bank

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As per recent modification in the rules and guidelines by Bangladesh Bank, every
financial institution has to maintain 10% capital adequacy ratio over its total risk
weighted assets. Over the last two calendar years, as per Bangladesh bank reports
average capital to risk weighted assets was more than the desired level. The stress
test result from the Bangladesh Bank report based on end December 2012 data
discloses that out of 31 NBFIs the 22 listed NBFIs submitted their stress testing
report formally. Among the 31 NBFI 3 are to be found in green zone, 19 are to be
found as in yellow zone and the rest 8 are to be found as in red zone.

Conclusion:
Emergence of NBFIs has created a new avenue in our bank dominance traditional
financial system. Long term lending of banks is mostly unfamiliar product for them,
and has created a serious distortion in the financial market. Rather than gaining any
benefit from such types of activities, the society is now carrying the load of
overwhelming default loans. As leasing is considered as an alternative of long term
financing many NBFIs have strong performance in leasing business. NBFIs have to
be equipped with highly professional personnel and technological advancement to
chase the future opportunities and competition as well. Strong institutional support
is necessary for the development of capital market which is the core of economic
development in the market economic system. NBFIs around the world provide
institutions support to the capital market. In Bangladesh, now 23 NBFIs are
registered with the SEC and they should concentrate more on their activities in the
capital market.
NBFIs are suffering from high cost and scarcity of funds. At present, with high cost
of fund non-banks are forced to compete with the banks those have relatively low
cost of fund. This situation somewhat hampers the growth and development of
NBFIs. For rapid growth and development of this sector, fund problem should be
solved on a priority basis. Opening of a refinancing window even for a limited period
of time may be considered after a strategic evaluation. Banking has the
multifaceted own activities so that for bringing more efficiency in their own
efficiency as well as the efficiency of the financial system they should not be
involved with the activities that the NBFIs can do. It is recommended that
government and the central bank will take initiatives to ease the fund constraint of
NBFIs so that they can minimize their cost of fund and to bring their cost of fund at
a market level. NBFIs from their part shall be much more attentive in rigorous
project analysis to perform the loans well. A modern and dynamic regulatory
framework is required for the rapid and effective development of NBFIs. Bangladesh
Bank has formulated and declared policies for classifying and provisioning of
investment resources of NBFIs in June 2000. The classification rule has been
formulated with a view to judging quality of investment funds, strengthening
discipline in lending and recovery, securing peoples deposit, having provisions for
the loss of unrecoverable invested funds and imposing interest against bad
investment. This classification procedure will definitely improve and promote the
activities of NBFIs, but the procedure is always subject to improvement with the
diversification of products of NBFIs. Secondary bond market growth of NBFI is much
better than the banks. This is a positive sign for the NBFIs. BB now establishes the
Basel Accord for the NBFIs which will ensure more clarity of NBFIs reporting.

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There are many problems in the development process of NBFIs and consequently
strengthening the financial system of Bangladesh. It is now well established that
NBFIs can contribute much in strengthening the financial system as well as in the
process of economic development of the country. Since inception in 1986, NBFIs are
some-what successful to draw attention of the people and establish its importance
in the financial sector as well as in the economy of Bangladesh. The business
growth of the NBFI and their performance and rating is improving every year, which
shows the positive sign for this industry. It is hoped that in future NBFIs would be
able to play more significant role in the development of economy of Bangladesh.
Banks and Non-Bank Financial Institutions are both key elements of a sound and
stable financial system. Banks usually dominate the financial system in most
countries because businesses, households and the public sector all rely on the
banking system for a wide range of financial products to meet their financial needs.
However, by providing additional and alternative financial services, NBFIs have
already gained considerable popularity both in developed and developing countries.
In one hand these institutions help to facilitate long-term investment and financing,
which is often a challenge to the banking sector and on the other; the growth of
NBFIs widens the range of products available for individuals and institutions with
resources to invest. Through their operation NBFIs can mobilize long-term funds
necessary for the development of equity and corporate debt markets, leasing,
factoring and venture capital.

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