chapter 4siteresources.worldbank.org/psglp/resources/chap4.pdffinancing in bangladesh. moreover, the...

Chapter 4

The Capital Market and the Non-Bank Financial Sector

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99 Prepared by Md. Shahiduzzaman, Research Economist.

4.1 Background 99

The capital market and the non-bank financial sector play a major role to meet the long-term financing needs of a country. Prior to the liberation in 1971, the industrial financing and capital market institutions in Bangladesh were dominated by the public sector. While the insurance businesses were mainly in the private sector, agricultural, industrial, housing finance and capital market institutions were in the public domain. The development of the private sector got added importance given the growing long-term investment needs of the country. Since the eighties, a number of non-bank financial institutions in the private sector, primarily leasing and insurance companies have come into existence (Kazemi, 1998). In addition, private commercial banks have also started to play a major role in industrial term financing.

According to provisional estimates of BB, a total of BDT50.8 billion (58.4 percent of total) of industrial term loans were disbursed by the private commercial banks in comparison to BDT17.3 billion (19.9 percent of total) by non-bank financial institutions, BDT11.4 billion (13.1 percent of total) by foreign banks, BDT4.5 billion (5.2 percent of total) by nationalized commercial banks and BDT3.0 billion (3.4 percent of total) by SBs in the FY05 (Bangladesh Bank, 2006, p. 49). The above figures depict the private sector dominance especially the private commercial banks in investment financing in Bangladesh. Moreover, the role of capital market in mobilizing funds for investment is still very limited; only BDT 1.2 billion was issued in FY05 as new capital in the capital market through private placements and public offerings (Bangladesh Bank, 2006, p45).

Increasing involvement of banks in term lending also increases the liquidity risk for the banks from the perspective of funding of long-term loans with typically shorter-term deposits. In order to meet the long-term credit needs on a sustainable basis, development of non-banking sector is extremely important for the country. In Bangladesh, major players of the Non-Bank

Chapter 4 (Continued)

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100 Prepared by Md. Shahiduzzaman, Research Economist.

sector include stocks exchanges, leasing and investment companies, merchant banks, insurance companies etc. Recently, a new trend in non-bank financial sector is the development of micro-financial institutions; where "small" savers actually save and borrow small amounts of money to expand their "small" enterprises.

Each of the institutions in the non-bank sector encompasses a distinct nature of the sources and uses of funds, asset portfolio and risk exposure. In order to get a comprehensive view of the overall non-bank sector, the analysis here has been broadly divided into four subsections. The first section analyzes the development of the capital market in Bangladesh, which focuses on the security markets, mutual funds, merchant banks and the Investment Corporation of Bangladesh. The second section analyses the SBs and the third section discusses the contractual savings products like insurance and pension. Earnings, profitability and the efficiency, depth and breath of each of the sub-sectors are included in the analysis. The fourth section discusses the evolution of the micro-finance services, its regulatory and supervisory issues. The final section of the chapter incorporates an outlook of the aggregate non-bank sector.

4.2 Capital Market in Bangladesh 100

(a) Background

The capital market in Bangladesh is growing at a slow pace. In last few years, especially after inception of SEC in 1993 and given the experience of share market bubble in 1996, there has been enormous changes in rules and regulations regarding public issues, right issues, acquisition, mergers and so on in order to accelerate market activities. Market surveillance and awareness have also been improved after 1996. However, the capital market in Bangladesh is still at a nascent stage and challenges remained towards gaining the investor's confidence.

Historically, as a consequence of the liberation war in 1971, the existing capital market activities came to a halt because majority of the members of the stock exchange were domiciled in Pakistan who left the country. In fact, there were no longer any companies listed at the DSE, which was inherited from the East Pakistan Stock Exchange Association (established on April 28, 1954).The then government also took the nationalization measures that continued until 1975 that totally disrupted the capital market activities. As a

101 For more detail of the history of DSE, see Monetary Policy Review, BB (2005: p 75).102 Note that all CSE-listed companies are also listed on the DSE.


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result, capital market activities actually suspended during the period. Eventually, as privatization began in the mid-seventies DSE started trading activities in 1976 with only 9 companies, mostly multinational.101 In 1977, The ICB was established in order to give institutional support to the stock exchange. In 1979, the first ICB Unit Fund came to the market. From early eighties, some banks including the AB Bank Bangladesh Ltd were listed and started trading at the exchange. During the period of 1979-85, trading at DSE, however, remained negligible. Continuous attempts were made by the Government to improve the trading activities for the next few years. Listing of the exchange crossed 100 in 1988 along with an increase in trading. In early 1990s, Foreign Exchange Regulations were revised and certain control regarding the transfer of shares and flow of foreign exchange were relaxed and the first international investor came to the market in 1993. The Chittagong Stock Exchange on the other hand was established in 1995 with 129 listed companies.102

From October 1993, trading at DSE started to rise at a relatively high rate. The DSE general index, which was introduced in September 1986, increased to 560.21 in January 1994 from 391.77 in December 1993. Market started to show a bullish trend and general index reached to 1156.18 in July 1996 and as high as 2300 in December 1996 before plummeting to 957.48 in April 1997. The stock market bubble and its demise of 1996 happened at the cost of thousands of individuals and households who came to participate in the market for the first time having little or no knowledge about the market fundamentals and who were mostly misled by the advices given by their brokers, and rumours (see Box-4.1 for details). For the next seven years the bear continued; the Decrmber 1998 index was 540.22 in comparison to 487.77 in December 1999, 642.68 in December 2000, 829.61 in December 2001, 848.41 in December 2002 and 967.88 in December 2003.

Figure 4.2.1 shows the evolution of monthly DSE General Share Price Index and turnover from January 89 to December 05 in terms of taka. The index reached a peak of 3064.99 in November' 96 from a level of 555.24 in January 89 then moved down to 484.44 in January 2000. After the 1996 crisis, the market index at DSE, in fact, started to revive from the first quarter of 2004. The monthly turnover, however, showed its volatility and reached a peak of Taka 11,168.83 million in March 2005.


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Source: Data from Dhaka Stock Exchange

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Figure 4.2.2No. of Securities Listed and Market Capitalization at the DSE (1985-2005)

After the dramatic crash of the stock market in 1996, the country’s capital market witnessed a remarkable turn in recent years especially during the year 2004; the market capitalization at DSE increased by 130.83 percent from the previous year in 2004 in comparison to 36.7 percent increase in 2003 and 11.7 in 2002. Figure 4.2.2 shows how market capitalization at DSE has advanced in 2004. The main reasons behind this growth were increased confidence of the investors in the capital market, changing of the settlement system of shares, which allowed more efficient. Chittagong Stock Exchange’s index rose from 1838.99 as of June 2002 to 1841.24 as of June 2003, 2329.46 as of June 2004 and 3347.1 as of June 2004.


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June 2002 June 2003 June 2004 June 2005 DSE CSE DSE CSE DSE CSE DSE CSE

No. of listed companies 238 170 241 172 248 182 239 184

No. of mutual funds 10 10 10 10 11 11 12 12

No. of debentures 9 4 9 3 8 2 8 2

No. of treasury bonds - - - - - - 18 -

Total No. of Listed Securities 257 184 260 185 267 195 277 198

Total Market capitalization(BDT in million) 65518.0 56145.0 72998.0 60208.6 142369.0125911.3224611.0202139.1

Table 4.2.1Some Selected Statistics of Dhaka and Chittagong Stock Exchanges

Source: Various Reports of Securities and Exchange Commission (SEC), Dhaka and Chittagong Stock Exchanges.

(b) Securities and Exchange Commission, DSE and CSE

Over the last few years, especially after the bubble in 1996, equity market in Bangladesh has undergone several structural changes in order to bring efficiency into the market. The SEC came into existence as capital market regulator as on 8th June 1993 through promulgation of the Securities and Exchange Commission Act, 1993 in order to ensure proper issuance of securities, to protect interest of the investors in securities, to develop and regulate the capital and securities market. CDBL was incorporated as a public limited company on 20th August 2000 to operate and maintain the Central Depository System (CDS) in order to provide efficient delivery, settlement and transfer of securities through a computerized book entry system. As of June 2005, 61 companies having 72.84 percent of the total market share in the Dhaka Stock Exchange have been brought under the depository system. Recent development regarding prudential regulations include, among other, amendment of the Rights Issue Rules (1998) and BB's instruction to the banks for sanctioning loan against dematerialized (demat) shares instead of paper scrip of the listed companies to avoid financial risk. SEC has also made it mandatory to open beneficiary owners’ (BO) account for application of shares through public offering.

Table 4.2.1 points out some basic statistics on the performance of DSE and CSE from June 2002 to June 2005. As of June 2005 a total of 277 securities were listed at the Dhaka Stock comprising 239 companies, 12 mutual funds, 8 debentures and 18 treasury bonds as opposed to the total of 267 securities comprising 248 companies, 11 mutual fund and 8 debentures as of June 2004. At the Chittagong Stock Exchange a total of 198 securities were listed comprising 184 companies, 12 mutual funds and 2 debentures as of June 2005 as opposed to the total of 195 securities comprise 182 companies, 11 mutual fund and 2 debentures as of June 2004.


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Figure 4.2.3Recent Trends (monthly movement) of Price Indices in

Dhaka and Chittagong Stock Exchanges (Jan'04-Dec'05)

Total market capitalization at DSE increased to Taka 224,611.0 million as of June 2005 in comparison to Taka 14236.9 million as of June 2004; a 57.77 percent annual growth from 2004 to 2005 (Table 4.2.1). The annual growth rate of total market capitalization was 95.03 from June 2003 to June 2004 and 11.42 percent from June 2002 to June 2003. Total market capitalization at CSE increased to Taka 202139.1 million as of June 2005 in comparison to Taka 125911.3 million as of June 2004; a 60.54 percent annual nominal growth from 2004 to 2005. The annual growth rate of total market capitalization was a 109.13 from June 2003 to June 2004 and 7.24 percent from June 2003 to June 2004.

Recent trends of share price indices of Dhaka and Chittagong Stock Exchanges are presented in the Figure 4.2.3. It is apparent from the figure that the two follow the same pattern. Indices in the both the markets showed a steady upward trend during March 2004 to December 2004, and then faced some volatility during Jan.-Aug.,2005 before becoming stable for the balance of 2005. During March 2004 to December 2004, the CSE index moved steeper than that of the DSE. Again, the DSE general price index in December 05 is nearly at the same level as that of October 04 level while the CSE all share price index in December 05 is nearly similar to the November 04 level.

Raising of Capital through Initial Public Offering (IPO): A total of seventeen companies floated IPOs amounting to BDT3206.9 million of capital at DSE, of which BDT1265.7 million were raised from initial public subscription in 2005. Table 4.2.2 shows IPOs in last three years (2003-


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2005) at DSE. A total of three companies' worth of BDT877.8 million and a total of fourteen companies BDT9776.7 million were floated IPOs in 2004 and 2003 respectively. In recent years, one observes an overwhelming response for IPO shares as evidenced by the oversubscription of the allotment by several times. In 2005, public subscription was 11.5 times higher than the public offering in comparison to 12.15 times higher in 2004 and 18.46 times higher in 2003. Reasons include the increased public confidence given some reforms of the stock market and the development of IPO distribution system by SEC.

Bond and Debenture: One important departure for the financial market in Bangladesh has been that government securities began trading at DSE from January 01, 2005. A total of 18 treasury bonds were listed at the DSE. As on June 2005, total market capitalization of debt securities stood BDT11589 million which is only 5.16 percent total market capitalization at DSE. A total of 8 debentures are listed at DSE with a market capitalization of only BDT576 million which is only 0.26 percent of total market capitalization. Thus the bonds and debentures comprise of 5.42 percent of total market capitalization. Initiatives should be prompted to stimulate the secondary market trading of bonds and debentures that would provide the investors alternative investment options.

Recent Movement of Earnings and Profitability at DSE: From Figure 4.2.1 we can also see the recent movement of DSE general index and turnover. The month closing DSE General Index stood at 1843.95 in January 2005, which went down to 1510.11 in July 05 before rising to 1677.35 in December 2005. Table 4.2.3 shows the comparative position of various DSE indicators from 2004 to 2005. It shows that the DSE General Index registered a 14.91 percent decline from end-December 2004 to end-December 2005. The DSE 20 index, which comprises the blue chips shares, also went down by 25.48 percent in 2005. Investors, however, continued to show their confidence as evidenced from the 26.64 percent increase in the value of daily average transaction. The market capitalization increased to BDT 233.08 billion (roughly 5 percent of GDP)

2005 2004 2003

No. of IPO held 17 3 14

Issue size in million BDT 3206.9 877.8 9776.7

Public Offer in million BDT 1265.7 473.9 1351.2

Public Subscription in million BDT 15795.2 6233.4 26305.7

Table 4.2.2Initial Public Offering at DSE (2003-2005)

Source: Monthly Review, December 2005, Dhaka Stock Exchange Ltd.


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103 Taking inflation into account, market capitalization will be seen as having fallen in real terms during the year. 104 The DLSE indicators have been left out from the analyses because of huge international capital inflow into the Exchange, which has made DLSE capital base and features different from DSE.

from BDT 224.92 billion in 2004 i.e., 3.62 percent increase from the previous year (DSE, 2005, p43).103 The price-earnings ratio and the dividend yield ratios indicated better performance at end-December 2005 than that in 2004.

Regional Stock Market Scenario in 2005: As of December 2005, the total number of listed companies at KSE was 661 in comparison to 239 companies at CLSE and 286 companies were listed at DSE.104 The market capitalization for KSE stood at Pakistani Rupees 2746.5 billion as at end-December 2005; a 59.4 percent increase from the previous year. The KSE All Share Index stood at 6444.64 at end- December 2005 in comparison to 4104.86 at end- December 2004, up by 57 percent. In the CLSE, the total market capitalization increased from Sri Lankan Rupee (SLR) 382 billion at end-December 2004 to 584 billion at end-December 2005, a 52.9 percent point-to-point increase from the previous year. The average daily turnover increased from Rs.240 million in 2004 to Rs.482 million in 2005 (Central Bank of Sri Lanka 2005). The month-to-month changes of share market activities at the CLSE, however, showed a rapid increase in the first nine months of 2005 and a slow down in the last three months of 2005.

The present market capitalization at DSE is only 6 percent (approximately) of GDP in terms of USD but the ratio is 42 percent for KSE and 23 percent for CLSE at end-December 2005. Market capitalization at DSE grew at a very low rate (3.62 percent) in 2005 in comparison to 59.4 percent for KSE and 52.9 percent for CLSE in local currency. Even though the average value of daily turnover in local currency increased by 26.64 percent at DSE,

2004 2005 Change (%)General Index* 1,971.31 1,677.35 -14.91DSE 20* 2,158.66 1,608.63 -25.48Daily Averager Transaction (BDT mn) 198.44 251.30 26.64Market Capitalization(BDT bn) 224.92 233.08 3.62P/E Ratio * 15.51 13.85 -10.70Dividend yield* 3.41 4.02 17.89* End-December

Table 4.2.3DSE Performance (2004 and 2005)

Source: Monthly Review, Dhaka Stock Exchange Ltd.


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in case of KSE it increased by 92.9 percent and in case of CLSE it increased by 100.83 percent between 2004 to 2005. Given the above facts, it can be concluded that both KSE and CLSE showed a strong growth in 2005, while the DSE performance were dismal in the year in comparison to the other two stock exchanges of this region. However, as vigilance of SEC has improved over time, it is expected that the capital market will become a more attractive source of funds for industrial and commercial enterprises.

(c) Mutual Fund, Merchant Banker and Asset Management

Developing the base of institutional investor is of utmost importance for the growth of a capital market. This is because developing the institutional sources of capital increases the demand for securities on a sustainable basis because of their better risk and return management capacity than for an individual investor. Also, institutional investors like the merchant bankers involve in the screening process to bring the quality shares into the capital market. In Bangladesh, participation of the institutional investors is still very limited. However, having realized the role of institutional investment in capital market development, the government of Bangladesh has amended a number of relevant laws. For example, the Insurance (amendment) Act 2000 (sec. 27) reduced the mandatory investment in government and government approved securities to only 70 percent thereby allowing the insurance companies room to invest in alternative products e.g., in the security market. The Trusts (Amendment) Act of 2000 allows private pensions and provident funds to invest up to 25 percent of total investigable funds to listed securities. The SEC laws have been amended in order to encourage private sector -sponsored mutual funds to operate in the market. Further SEC (Merchant Banker and Portfolio Manager) Act of 1996 facilitated the operation of merchant bankers and portfolio managers.

The first private mutual fund is the AIMS First Guaranteed Mutual Fund which started operating in the market in May 2000. As of June 2005, twelve mutual funds are operating in the market with a total market capitalization of BDT1247.00 million which is rather low relative to the value of total market capitalization. Among the twelve mutual funds eight are managed by Government owned ICB, two are managed by ICB Asset Management Company Ltd., one is managed by BSRS and the remaining one is managed by the AIMS of Bangladesh Ltd. More private mutual funds and their active participation are needed in order to revive the capital market. Table 4.2.4 shows the names of the mutual funds, share capital, market capitalization, price earning ratio and yield rate at DSE. The total market capitalization of all mutual funds was BDT1, 247 million


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105 Prepared by Md. Shahiduzzaman, Research Economist, PAU and Mahmud Salahuddin Naser, Joint Director, Monetary Policy Department, Bangladesh Bank

as on June, 2005, which is very low relative to the total market capitalization. The price-earnings ratio is the lowest and yield rate is the highest for Aims 1st Mutual Fund among the fund.

Box 4.1: The Stock Market debacle in 1996105

Stock markets in Bangladesh had experienced an unprecedented volatility in the latter half of 1996. During June 1996 to November 1996, all share price index increased from 959.05 to 3064.99 at DSE and 409.55 to 1472.68 at CSE. Market turnover and market capitalization also showed unusual hike during the period. Naturally, the bubble came to an end: the stock market prices dropped by close to 70 percent in end-April 1997 from the peaks in November 1996. However, in the meantime, it caused a lot of hard consequences from the perspective of stock market development in Bangladesh. Retail investors lost hugely in terms of money and confidence.

After the stock market crisis in 1996, SEC described the situation by "Recent unusual and abnormal price fluctuation in the Dhaka Stock Exchange and Chittagong Stock Exchange led to strong reactions among the public and particularly among the investors in the capital markets. There has been general allegation by investors that there were some fraudulent acts and insider trading which may have contributed to the abnormal fluctuation in the (share) prices" (Equity Committee, 1997). An ADB report summarized the situation as “due to the inability of the existing stock exchanges to service the requirements of small retail investors who jumped on the bandwagon, a huge unofficial kerb market in shares developed" (Program Performance Audit Report, ADB, May 2005).

After reviewing some of the literature on this issue the common causes regarding the stock market crash in 1996 can be synthesised as follows:

n A general confidence among the investors along with the restoration of political stability, irrational exuberance of inexperienced new generation investors fuelled by fake stories of making profit quickly resulted in sky-rocketing demand for shares while market did not have adequate number of fundamentally sound shares.


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1st ICB M.F. 1980 5 132.75 13.91 7.532nd ICB M.F. 1984 5 41.00 10.41 6.103rd ICB M.F. 1985 10 69.70 16.92 7.174th ICB M.F. 1986 10 56.40 8.06 7.985th ICB M.F. 1986 15 51.15 16.23 7.046th ICB M.F. 1987 50 108.88 13.72 8.047th ICB M.F. 1995 30 65.33 13.02 6.898th ICB M.F. 1996 50 102.63 12.01 6.821st BSRS 1997 50 55.38 15.79 5.42Aims 1st M.F. 2000 70 109.90 6.58 9.55ICB AMCL 1st M.F 2003 100 302.25 21.39 3.97ICB AMCL Islamic M. F. 2005 100 151.75 - -

Name Year of listing

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Market Capitalization(29.06.05) (BDT ml)

P/E Ratio

Yield%

Table 4.2.4Some Selected Statistics of Mutual Funds

Source: Monthly Review, June 2005, Vol. 20, No. 6, Dhaka Stock Exchange Ltd.Note: P/E(x): Closing Price/ Earning Per Share Yield (%): (Dividend per Share/Closing Price) x 100 Market Capitalization: Closing Price x Number of Shares.

Box 4.1 : The Stock Market debacle in 1996 (Continued)

n The prevalence of big kerb market (number of small investors reached over 25,000) provided wider scope to have rumours affect share prices through infiltration into the kerb market by the agents of the sponsors and member-brokers (Alam and Jahan, 1996, p. 23) .

n Inadequate infrastructure such as lack of proper settlement system, information efficiency and prudential regulations left scope for manipulating the market.

n There prevailed an absence of transparency of the activities of the stock exchange members, who concurrently functioned as brokers and dealers, and this led to malpractices with the investors when the interests of the investors and the members themselves were in conflict.

n Some policy decisions and their proper application such as declaration of withdrawal of lock-in to encourage activities of foreign investors and introduction of circuit breaker to hold unabated price of shares might make the retail investors feel that these policies were cushion, which would protect them from risk and made them over enthusiastic to get hold of some shares by any means.

106 Prepared by Mainul Islam Chowdhury, Research Economist.


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A total of 29 companies are now listed as merchant banks in Bangladesh, of which, 22 are full fledged (issue manager, underwriter and portfolio manager), 6 serve only as issue managers, and one is a portfolio manager. However, the performance of most of the aforesaid companies is not satisfactory and most of them have indeed become dormant. Newspaper sources say that only four merchant banks namely Arab Bangladesh Bank Ltd., ICB capital management Ltd., Prime Finance and Investment Ltd. and AAA Consultants and Financial Adviser are fully operational in the market (The Financial Express, April 19, 2006). However, SEC is now pressing hard to make the merchant bankers fully operational. Accordingly, the Securities and Exchange Commission (merchant banker and portfolio manager) Regulations, 1996 were amended on April 17, 2006 permitting the bankers to do portfolio management with the bankers' own fund.

(d) Investment Corporation of Bangladesh (ICB) 106

The ICB was established on October 1, 1976 under the Investment Corporation of Bangladesh Ordinance, 1976. The major objectives of ICB are to encourage and broaden the base of investment, to develop the capital market, to mobilize savings, to form and develop subsidiaries to spread out the business and to provide for matters ancillary thereto. ICB performs the traditional functions of a merchant bank including underwriting, issue management, portfolio management, trading in stock exchanges, private placement and equity participation, fund management (both closed and open-end mutual funds), opening and maintaining investors’ accounts, providing advisory services to the investors, lease financing, project financing, providing consumer credit, providing bank guarantees, acting as a trustee etc. ICB’s authorized and paid up capital are 1 (one) billion and 500 (five hundred) million taka respectively.

Operation 2002-03 2003-04 2004-05P

Deposit 6066 8519 11019Loans and Advances 6810 3960 11401Lease Finance 85 114 614

Investment 4816 4034 4753

Total Income 1138 1376 1713Total Expenditure 1031 1210 1516Total Profit 107 167 197

Table 4.2.5Major Indicators of ICB Operation (in million BDT)

Source: Activities of Banks and Financial Institutions 2004-05,Finance Division, MOF, GOB. pp.251

Note : P = Provisional


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107 Prepared by Mainul Islam Chowdhury, Research Economist.

The latter is divided into 4660418 general shares each having a value of 100 (one hundred) taka, of which government of Bangladesh owns 29 percent, Bangladesh Bank 13 percent, Nationalized Commercial Banks 21 percent, Development Financial Institutions 15 percent and Insurance Companies 13 percent. The rest is owned by different Private Commercial Banks and general public. Major indicators of ICB operations are summarized in Table 4.2.5.

In FY05, ICB’s total income and expenditure are estimated to be BDT1713 and BDT1516 million respectively leaving a profit of BDT197 million. Total income, expenditure and profit are expected to have grown at the rate of 24.5 percent, 25.3 percent and 18 percent respectively in FY05. ICB has recently formed three subsidiaries namely the ICB Capital Management Company Ltd (ICML), the ICB Asset Management Company Ltd (IAMCL) and the ICB Securities Trading Company Ltd (ISTCL). ICML performs the roles of underwriter, Issue manager and placement service provider. The net investment of ICML in FY05 was 0.09 billion taka. IAMCL made a net investment of 0.4 billion taka in 2 close ended and 2 open ended mutual funds and the market price of this investment was 0.5 billion taka in FY05. IAMCL’s net investment from its own portfolio stood at 0.1 billion taka and the market price of that investment was 0.2 billion taka. Launching its operation in ISTCL emerged as the largest stock broker both in Dhaka and Chittagong Stock Exchanges, handling a total transaction of 9.4 billion taka in FY05.

4.3 Non Bank Financial Institutions 107

Non-Bank Financial institutions 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 or housing; carries on business of the underwriting or acquisition of, or the investment or re-investment in shares, stocks, bonds, debentures or debenture stock or securities issued by the government or any local authority; carries on business of hire purchase transactions including leasing of machinery or equipment; finances venture capital; gives loan for house building and property purchases and uses its capital to invest in companies. The major differences of NBFIs with commercial banks are that the former cannot accept any deposit which is payable on demand by cheques, drafts or orders drawn by the depositor and can not deal in foreign exchange. From July 2005 NBFIs have been allowed to receive deposits of minimum 6 month tenure only in case of institutional deposits; prior to this instruction NBFIs were not allowed to receive deposit of less than one-year tenure. NBFIs are expected primarily to fill in the gaps in the supply of financial


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108 A list of NBFIs in Bangladesh is presented in appendix 4.1 at the end of this chapter.

services that are not in general provided by the banking sector and to complement the banking sector to meet financing requirements of the evolving economy. There are 28 NBFIs in Bangladesh (as of June 2005).108 The major business of most NBFIs is leasing, though some are also engaged in merchant banking and housing finance.

(i) Leasing

Leasing involves a contractual relationship in which the owner (lessor) of an asset or property grants to a firm or a person (lessee) the use of the assets’ services for a specified period of time, usually for an agreed sum of rent. The firm can use the asset by paying a series of periodic amounts called lease payments or lease rentals to the owner of the asset at a predetermined rate. The payment may be made monthly, quarterly or annually.

Recent Developments

The first leasing company of the country, Industrial Development Leasing Company of Bangladesh Ltd (IDLC) started its journey in 1985. The leasing industry has experienced considerable growth over the last twenty years. Some of the leasing companies are primarily engaged in leasing, some are also diversifying in other lines of business like merchant banking, equity financing, term lending and house financing etc. Lease financing constitutes 54.5 percent of the total long term assets with the rest consisting mainly of term financing. The leasing industry offers its services to various sectors such as textile, chemicals, services, pharmaceuticals, transport, food and beverage, leather products, construction and engineering etc. The minimum capital requirement of NBFIs is 250 million BDT. All NBFIs are required to raise their minimum capital through IPO by June 2006. As of June 2005 total paid up capital and reserves of the NBFIs were 6.93 billion and 5.52 billion BDT respectively amounting to a total shareholders’ equity of 12.46 billion BDT.

Earnings and Profitability

The Leasing sector has witnessed a growth of 27.64 percent in 2005 (in terms of outstanding lease/loan) over the previous year. In 2004 the growth was 45.94 percent whereas the annual average growth over the last four years stood at 33.89 percent. Figure 4.3.1 shows that the leasing industry has been growing consistently. The share of classified lease/loans is a little above 6 percent (measured on the right axis) in 2005 which was about the same in 2004. The share of classified loans has however decreased since


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109 Growth rate of total asset for 2005 is calculated on an annualized basis from half yearly data.

Source: Constructed by the author from data provided by the Financial InstitutionsDepartment, Bangladesh Bank.

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20304050

6070

Perc

enta

ge

Total Asset Growth Rate of Total Asset

Source: Constructed by the author from data provided by the Financial InstitutionDepartment, Bangladesh Bank

Figure 4.3.2 Total Asset of Leasing Industry109

2002 (which was 8.42 percent of total outstanding). This trend is similar to that of their major competitor in the market namely the PCBs. Classified loans of PCBs have also decreased from 16.38 percent in 2002 to 5.62 percent in 2005. Though PCBs had a higher share of classified loans in 2002 they have been able to bring it down faster than the NBFIs have.

Total asset of the leasing industry is also growing at an annual average rate of 33.9 percent over the last four years (Figure 4.3.2). Growth of assets was over 62 percent in 2002 but fell gradually to 15 percent in 2004.


144

110 Industry wise ratios are calculated taking weighted averages of the ratios of individual firms in the industry. In calculating the industry average one leasing company was not considered as it has a very limited debt (close to zero) and therefore the ratios for this firm is far away from the industry average and can be treated as outliers.Current Ratio = Current Assets/Current Liabilities. The weight is calculated using current asset. Debt-Equity Ratio = Total Debt/Shareholder's Equity. The weight is calculated using shareholder's equity.Debt-Total Asset Ratio = Total Debt/Total Assets. The weight is calculated using total assets. Return on Equity = Net profit after taxes/Shareholder's Equity. The weight is calculated using shareholder's equity.Return on Investment = Net profit after taxes/Total Assets. The weight is calculated using total assets. Measures overall effectiveness in generating profits with available assets. Earning power of invested capital.

Current

Ratio Debt- Equity Ratio (times)

Debt-Total Asset

Ratio (times)Return on

Investment (%) Return on Equity (%)

2002

2003

2004

2005*

1.98(2.99)

1.91(4.32)

1.81(3.01)

1.93(2.85)

1.61(6.16)

2.20(5.30)

2.42(2.98)

2.87(3.03)

0.61(0.28)

0.69(0.26)

0.71(0.25)

0.75(0.23)

2.50(2.63)

3.31(2.01)

4.79(7.27)

2.08(1.22)

6.57(9.84)

10.57(8.76)

16.37(9.85)

7.91(7.64)

Table 4.3.1Performance Ratios of the Leasing Industry

Source: Calculated by the author from data provided by the Financial InstitutionDepartment, Bangladesh Bank

Note: Figures in the parentheses indicate standard deviation. *=Based on half yearly data of January-June, 2005

Growth in 2005 was over 45 percent at an annualized rate (data being available up to June). In a market with considerable competitive pressures from banks and other financial institutions, the leasing industry has exhibited significant resilience.

For measuring the performance of the leasing industry we look at the current ratio, debt-equity ratio and return on equity of the industry as measures of liquidity, risk coverage and profitability respectively.110 Table 4.3.1 and Figure 4.3.3 highlights these ratios.

Current ratio measures the ability to meet current debts with current assets. The current ratio of the leasing industry hovered around a little below 2 over the last four years. In 2002 it was 1.98 and in 2005 it was 1.93 showing consistency in the industry’s ability in managing their liquidity position. The current ratio of individual firms varied widely in 2005 from 0.37 to 11.82 (though one company has a current ratio of 77.95, which is treated as an outlier). In June 2005, five leasing companies had current


145

2002 2003 2004 2005Year

Current Ratio Debt-Equity Ratio Debt-Total Asset Ratio

0

0.5

1

1.5

2

2.5

3

3.5

Source: Financial Institutions Department, Bangladesh Bank

Figure 4.3.3Current Ratio, Debt-Equity Ratio and Debt-Total Asset Ratio

ratios which are less than 1 and four had current ratios greater than 5 while the standard deviation was 2.85. Firms having a current ratio well below the industry average should carefully monitor their liquidity management.

The debt-equity ratios of leasing companies varied from 0.27 to 11.08 in 2005 (up to June) whereas the weighted average debt-equity ratio of the industry was 2.87 and the standard deviation was 3.03. As of June 2005 five companies had debt-equity ratios of more than 6. Though the leasing industry is conservatively leveraged, the increasing trend of the debt-equity ratio from 2002 as can be seen in Figure 4.3.3 indicates that the leasing industry is mobilizing a greater amount of debt gradually as the industry is attaining maturity.

Return on Equity (ROE) and Return on Investment (ROI) of the leasing industry experienced an increasing trend during 2002 to 2004. As of June 2005 weighted average industry ROE and ROI stood at 7.91 and 2.08 respectively which were 16.37 and 4.79 respectively in 2004. The half yearly figures of 2005 are compatible with those of 2004 if considered on an annualized basis. Therefore, the leasing industry is doing well in terms of profitability having an increasing trend in the profitability ratios in recent years. These ratios are also quite adequate if compared with that of the PCBs. ROE of PCBs showed a similar pattern which increased to 19.53 in 2004 from 11.37 in 2003 and in June 2005 ROE of PCBs was 9.56 (19.12 on an annualized basis). Therefore the leasing industry has performed well vis-à-vis the PCBs’ and stood up to the challenges in a small market having a large number of competitors.


146

111 Heavily edited by Dr. M. Habibur Rahman, Senior Research Economist on the basis of an initial draft prepared by Shamim Ara (Deputy Director, Statistics Department)

(annualized)

(annualized)

02468

1012141618

2002 2003 2004 2005

ROI ROE

Source: Financial Institutions Department, Bangladesh Bank

Figure 4.3.4Return on Equity and Return on Investment

4.4 Performance of SBs in Bangladesh (2002-2005)111

The Government of Bangladesh established some development financial institutions with the aim of providing special attention to the development of agriculture, industry and commerce. There are 5(five) Development Financial Institutions (SBs) in the country namely, (1) Bangladesh Krishi Bank (BKB) (2) Rajshahi Krishi Unnayan Bank (RAKUB) (3) Bangladesh Shilpa Bank (BSB) (4) Bangladesh Shilpa Rin Shangstha (BSRS) and (5) Bangladesh Small Industries and Commerce (BASIC) Bank Limited. These SBs have been playing a leading role in the money as well as capital market in terms of providing short and long-term financial service in Bangladesh. Performances of each of the SBs are as follows:

(a) BKB

The BKB was established as a fully Govt. owned bank under presidential order 27 of 1973. It has 941 branches all over Bangladesh as of end March 2006. The BKB provides loans to individuals and corporate bodies in the field of production of crops, purchase of irrigation machineries and equipment, development of horticulture, pisciculture and animal husbandry including various socio-economic and poverty alleviation programs. The total assets of the bank stood at BDT 79303 million in FY02, BDT 82173 million in FY03, BDT 87417 million in FY04 and BDT 95284 million in FY05 respectively. The authorized as well as paid up capital of the bank also displayed an increasing trend over the period of FY02-FY05.


147

The amount of loans and advances of the bank increased from BDT 55035 million in FY02 to BDT 65675 million in FY05 reflecting a substantial growth of 19.33 percent in disbursement of loan and advances along with a good recovery rate resulting in a declining trend in the NPL ratio during the period. The interest rates of lending and deposits also declined during FY02 to FY05. Because of the inefficiency and lack of competitiveness this bank’s soundness indicators are not so encouraging. The ratio of debt to equity is getting larger and larger along with a negative CAR in every year. The profit/loss account of BKB also displayed huge losses over the years.

(b) RAKUB

The RAKUB was established with the aim of providing institutional agricultural credit for optimum utilization of agricultural potentials of Rajshahi Division taking over the branches and offices along with assets and liabilities of the Bangladesh Krishi Bank within Rajshahi Division. The bank started functioning on 15 March 1987, as the largest development partner in the northwest region. RAKUB aims at overall development of the farmers and all the sectors and sub-sectors of agriculture in the region. A total asset that belongs to RAKUB is continuously increasing over the years. Likewise BKB, the RAKUB also incurs negative profit every year resulting in a huge accumulation of debt to equity ratio. Recently, however, the debt against equity has decreased marginally.

(c) BSB

The BSB was established on 31st October 1972 under the Bangladesh Shilpa Bank Order 1972. BSB, the prime development financing institution of the country, provides financial assistances for setting up new industries and rehabilitation of sick industries. This bank started full-fledged commercial banking from 1993. As per the data of BSB, authorized capital remained same at BDT 2000 million during FY02, FY03, FY04 and FY05. The amount of paid up capital stood at BDT 1320 million during FY02 and FY03 and BDT 2000 million during FY04 and FY05. Likewise other government owned specialized financial institutions some indicators of the BSB’s performance, such as debt to equity ratio, CAR, profit/loss account showing disappointing scenario over the last few years.

(d) BSRS

The BSRS was established on October 31, 1972 to provide credit facilities and other assistance to industrial concerns and to encourage and broaden the base of investment in Bangladesh. The condition of loans and advances


148

112 Prepared by Md. Alauddin Majumder, Research Economist.

of bank has been declined drastically during June 2002 to June 2005 due mainly to shutdown of its regional office outside Dhaka city and write-off of bad loans in 2003. Notwithstanding a sharp reduction in the amount of total assets, the performance of NPL and loan recovery situations improved during FY02 to FY05. At the same time the debt to equity ratio, CAR and profit/loss account of the institutions shows signs of improvement during the period.

(e) BASIC

The BASIC Bank Ltd., established as a banking company under the companies Act 1913, launched its operation in 1989. The bank initially started as a joint venture enterprise. From June 1992, however, BASIC bank is fully owned by the Govt. of Bangladesh. The paid up capital as well as loans and advances disbursed by bank is depicting increasing during 2002-2005. Because of lower recovery rate than that of disbursement the NPL ratio of the bank witnessed a moderately increasing trend during the period. Total assets of the bank increased to BDT 27136 million in 2005 from BDT 13019 million in 2002 reflecting a healthy growth in the total assets position of the bank. The scenario of debt to equity ration displayed a declining trend during 2002-2005 due to its continuous positive profit margin. The overall performance of the bank is relatively better than other SBs of the Government of Bangladesh.

Conclusion

Although the Government of Bangladesh established some development financial institutions with the aim of providing special attention to the development of agriculture, industry and commerce, the overall performance of SBs as a group is not so encouraging. All most all of the SBs, as other government owned enterprises, suffer badly in terms of low capital base, high debt-equity ratio, low loan disbursement and recovery rate and make losses consistently mainly because of inefficiency, bad governance and lack of competitive environment.

4.5 Microfinance Institutions (MFIs) 112

(a) Emergence and Proliferation of MFIs in Bangladesh

At the time of independence in 1971 there existed a publicly managed cooperative system which looked after the financing for the rural people. The functions of the cooperative system were partly alike that of the


149

113 Kazemi (1998).114 David and Karen (2005). The acronyms BRAC and ASA stand for Bangladesh Rural Advancement Committee and Association for Social Advancement, respectively. They were established in 1972 and 1978 respectively, and started microcredit activities in 1974 and 1991 respectively.

institutions presently called microfinance institutions (MFIs). In course of time the cooperative system began to decay for various reasons. Gradually the moribund cooperative system was supplanted by group-based supervised microcredit delivery through NGOs.113 Reportedly the MFIs’ origin dates back to 1970s when the nation was engaged in reconstructing the war-torn economy. In that period a few MFIs such as BRAC, ASA, Proshika came into existence, but not exactly in the form they are currently assuming.114 Expansion of this sector began in the 1980s when small

scale lending, microcredit was recognized as a weapon to reduce poverty. The Grameen Bank, which is considered the mother of modern-day microfinance institutions, was established in 1983 following successful completion of an experimental project that had started in 1976. MFIs attempted to consolidate the Grameen Bank model within them after continuing success of Grameen Bank in extending microcredit and related services. A rapid and robust expansion of MFIs occurred during 1990s and onward. The early expansion was facilitated by the inflow of “soft” donor funds. New MFIs entered and existing MFIs opened new branches. As a step to patronize microfinance activities and enhance their contribution towards the development process, the Ministry of Finance (MOF) and the Bangladesh Bank extended significant low-interest lending to Grameen

December’96 351 6.01 2390.72 27837.24December’97 380 6.74 3381.51 43987.43December’98 495 7.86 5216.26 66565.50December’99 533 9.43 6921.66 92436.20December’2000 585 11.02 8866.02 125607.61December’01 629 12.45 10780.99 164261.67December’02 656 12.86 12967.55 208619.05December’03 720 14.63 15560.97 269472.09December’04 721 16.62 17807.55 338635.65

As ofNo. of

NGO-MFIsActive Members

(in million)Net Savings(million BDT)

Cumulative Disbursement (million BDT)

Source: Various issues of CDF Statistics

Table 4.5.1Growth in the Number of NGO-MFIs in Bangladesh


150

115 World Bank (2005).116 Cited in World Bank (2005).117 Rashid and Matsaert (undated).

Bank for a period. Besides, government established Palli Karma Shahayak Foundation (PKSF) as a second tier MFI on May 2, 1990. Table 4.5.1 clearly projects the proliferation of NGO-MFIs in Bangladesh.

The notable expansion of the microfinance industry in Bangladesh might be attributed to a number of factors such as the virtual absence of credit other than that at the usurial rates in the rural informal sector, availability of soft funds for on-lending, high population density, availability of a good transportation-infrastructure network, presence of strong NGO-MFI leadership and management skills, non-prudential regulatory regime, and a supportive environment created by government.115

(b) MFIs’ Activities

MFIs are engaged in a host of activities mostly dominated by microcredit. “A World Bank survey of three hundred NGO branches in 2003 shows that while the total range of NGO interventions is wide, the typical NGO branch provides between three to four services. Around 90 percent of all NGO branches provide credit services, followed by health (56 per cent),

sanitation (52 per cent), and education (45 per cent). Advocacy and public awareness work are also common areas of NGO work: 93 per cent reported awareness-raising activities, usually relating to sanitation, health and social issues”.116 Box 4.5.1 presents core functions of MFIs with categories and subcategories together.117 It is worthwhile to mention that many of the functions are performed in collaboration with local and central government agencies.

Box 4.5.1Core Functions of MFIs

Savings

1. Mandatory2. Voluntary3. Flexible4. Daily5. Time deposit6. Fixed

Credit

1. Term loans2. Entrepreneur loans3. Housing loans4. Health & sanitation loans5. Seasonal loans 6. Disaster loans7.Special loans8. Consump- tion loans

Insurance

1. Health insurance2. Life insurance3. Credit insurance4. Property insurance5. Crop insurance

Training/ Counselling

1. Business planning & management2. Entrepreneurship development3. Basic accounting and cash management4. Product diversification5. Innovation Research

Marketing

1. Marketing outlay2. Production centre3. Promotional activities4. Infrastruc-ture support

Institution Building

1. Group formation2. Awareness raising3. Leadership development4. Linking/net-working5. Information sharing


151

Total grant aid to Bangladesh Grants to NGOsShare of NGO grants in total grant aid

0

200

400

600

800

1000

1200

Gra

nts

-5515253545556575

Sha

re o

f N

GO

gra

nts

(%)

FY 9

1

FY 9

2

FY 9

3

FY 9

4

FY 9

5

FY 9

6

FY 9

7

FY 9

8

FY 9

9

FY 0

0

FY 0

1

FY 0

2

FY 0

3

FY 0

4

Source: World Bank (2005)

Figure 4.5.1Grant Flows to NGOs

(c) MFIs’ Sources of Fund

The fund used by the microfinance sector comes from both external and internal sources. Historically MFIs have been able to attract external funds from international donors and international NGOs typically on non-market

terms. While the share of donor funds routed through NGOs (not all of which are aimed at microcredit) have risen consistently over time (Table 4.5.2 and Figure 4.5.1), the dominance of internal sources have grown even more (Table 4.5.3). NGO-MFIs raise "own source" funds through

Fiscal yearTotal grant

aid to Bangladesh

Grants to NGOs

Share of NGOgrants in totalgrant aid (%)

1990-91 938 106.6 11.41991-92 939 121.6 12.91992-93 1014 195.7 19.31993-94 881 171.0 19.41994-95 1100 209.5 19.01995-96 936 259.3 27.71996-97 986 250.1 25.41997-98 710 206.9 29.11998-99 944 273.5 29.01999-2000 908 182.4 20.12000-01 782 250.9 32.12001-02 689 208.3 30.22002-03 790 279.6 35.42003-04 690 310.0 44.9

Source: World Bank (2005)

Table 4.5.2Grant Flows to NGOs (in million USD)


152

Source: CDF (2005)

0102030405060708090

100

2000 (N=585)

2001 (N=629)

2002 (N=656)

2003 (N=720)

2004 (N=721)

1. External

2. Internal

2.1 Own sources

Source: CDF (2005).

Figure 4.5.2Trend Comparison of NGO-MFIs' External and Internal Sources of Fund

members' savings, service charge and own fund and other sources (e.g., PKSF, CDF etc.). See also Figure 4.5.2. Table 4.5.3 and the accompanying figure clearly indicate the decline of dependence of MFIs on external sources. Over the past five years, the external fund's share in total revolving loan fund (RLF) has been reduced almost by half. In the composition of internal source, own sources went up in proportion from 45 percent in 2000 to 56.57 percent in 2004 while other sources came down in proportion from 36.40 percent in 2000 to 32.75 percent in 2004. The table also shows that throughout the period under consideration members’ savings is the largest source of funds among all the sub-sources. All these dynamics convey the message that the microfinance sector is gradually becoming more and more self sustainable over time.

1. External 18.60 18.00 15.30 13.30 10.68International donors 18.00 17.40 14.80 12.70 10.24International NGOs 0.50 0.70 0.50 0.60 0.432. Internal 81.40 82.00 84.70 86.70 89.322.1 Own sources 45.00 44.10 50.60 56.00 56.57Members' savings 25.50 24.10 26.90 28.50 28.50Service charge 16.00 16.80 17.80 23.80 23.69Own fund 3.60 3.30 5.90 3.70 4.382.2 Other sources 36.40 37.90 34.10 30.70 32.75PKSF 23.00 23.50 21.90 20.80 17.01CDF 0.00 0.00 0.00 0.00 0.04Local banks 9.80 11.20 9.10 8.30 12.74Local NGOs 0.50 1.50 0.40 0.40 0.21Others 3.20 1.70 2.70 1.20 2.75Total 100.00 100.00 100.00 100.00 100.00

Sources 2000(N=585)

2001(N=629)

2002(N=656)

2003(N=720)

2004 (N=721)

Table 4.5.3Distribution of Revolving Loan Fund (RLF) by Sources (% of Total RLF)


153

118 MIX (2005).119 MIX (2006).120 MIX (2005).121 CDF (2005).122 MIX (2005).123 Morduch and Armendáriz de Aghion (2005) point out that the Microbanking Bulletin does not include some of Bangladesh's well known MFIs because of their failure to conform to the international accounting standards. Therefore, financial indicators such as the overdue ratio, the recovery rate etc as advertised by the MFIs to indicate their success should be treated with caution.

(d) Overall Performance

The microfinance sector in Bangladesh has broken many records in the financial arena. The Grameen microfinance model is being widely replicated around the globe because of its outstanding performance. Available statistics suggests that Bangladesh MFIs have the largest outreach in both South Asia and the world.118 Out of top 15 MFIs by number of borrowers (2003) in the developing countries 10 are Bangladeshi with 5 being included in the top 6. These 10 MFIs serve 38.8 percent of the total number of borrowers of the developing countries.119 Three leading MFIs, Grameen Bank, ASA, and BRAC, having widespread national coverage, serve 75 percent of total South Asian micro borrowers.120 As of December 2004, the number of outstanding borrowers was 11.96 million out of which 90.66 percent were women.121 The domination of the women clients confirms the deeper outreach achieved by the MFIs as women are typically excluded from formal rural lending. The depth in outreach is further supported by the fact that outstanding borrowers add up to 71.98 percent of total active members. Growth of outreach - ranging approximately from 10 percent to 15 percent during the past couple of years - is also remarkable. A survey conducted on the basis of 2002 and 2003 financial data shows that the indicators of financial performance yield very satisfactory results.122 Eight Bangladesh MFIs have been included in the list of ten most profitable MFIs in South Asia. Group-based approaches to lending allow Bangladesh MFIs to enjoy least financial expense. These approaches enable MFI staff to accomplish more tasks and incur lower costs. The low cost is indicative of high productivity. Credit staff productivity appears to be at a satisfactory level. The number of borrower per credit staff and loan portfolio per credit staff for MFIs have been estimated as high as 202 and BDT 0.75 million respectively. The loan portfolio quality has been found to be very sound. The recovery rate is 98.79 percent while the overdue-outstanding loan ratio stands at 3.4 percent.123 The high quality portfolio is believed to be the result of peer monitoring, close supervision and the group-based approach to lending.


154

124 Morduch and Armendáriz de (2005).

(e) Success of the Group-based Approach

There is wide recognition that the group-based approach to lending is the key factor behind the success of MFIs in Bangladesh. In this approach loan is given without any visible collateral to a borrower who must belong to a group formed as per the constitution of loan giving MFI. Every member of the group will be liable for that loan in that once the loan is defaulted each member will lose the eligibility to get a new loan. Group members, therefore, have the incentive to ensure that no borrower defaults. So the borrower always remains subject to strict monitoring by other members. Thus the possibility of loan default reduces substantially. The members' consciousness about the loan is in a sense one kind of invisible collateral or "social collateral". Whereas in the individual approach, adverse selection and moral hazard due to asymmetric information, even in the presence of collateral, are common phenomena. In the group-based approach the possibility of such phenomena is almost eliminated by tagging the interest of lender with the interest of the other members of the borrower's group.

Mention should, however, be made of two important points. Firstly, group model is not unique in any sense. It differs across MFIs and from purpose to purpose and the difference is in respect of size and modalities. For instance, Grameen Bank’s group consists of 5 members, while BRAC, ASA and Proshika form their groups with 20-40, 20-25 and 15-20 members respectively. Secondly, in some cases individual approach has advantages over group approach. In a society characterized by sparse population and/or heterogeneous population and/or social divisions, where peer monitoring entails higher cost and social punishments for non-compliance are hardly possible, individual approach is more effective than group approach.124 Keeping this in mind, presently many MFIs, alongside the group-based approach, are also following the individual approach in their lending activities. Grameen Bank, for example, has some innovations which involve individual approach. Progressive lending, one of Grameen Bank products, does not hinge on group model. Individuals in good standing have access to this loan. Besides, under its Struggling Members’ Program, loans are given to individual beggars without any group involvement.

(f) Regulatory Framework

Presently Bangladesh microfinance sector is not subject to any prudential regulatory framework. However, Grameen Bank, the largest MFI in Bangladesh, is an exception to this case. Although not prudentially, it is


155

125 Prepared by Shubhasish Barua, Research Economist.

regulated by the Ministry of Finance (MOF) to a certain extent through the Grameen Bank Ordinance, 1983. The other MFIs are regulated with extreme flexibility; they merely need to be registered with the NGO Affairs Bureau (NGOAB). The registration is indeed mandatory for an MFI only if it decides to take donor funds; otherwise it needs not to do so. Realizing the necessity of regulation recently the government has taken initiatives to promulgate a suitable regulatory framework for MFIs. The formation of Microfinance Research and Reference Unit (MRRU) in the Bangladesh Bank is one of the most important initiatives in this regard. A high powered steering committee headed by the Governor of the Bangladesh Bank has been given the charge to monitor MRRU and develop a coherent legal framework for the microfinance sector in Bangladesh. The MRRU has already published an operational guideline which has been approved by the steering committee. Different reporting formats, guidelines for financial activities and performance measurement, and terms of references for audit are incorporated in this guideline. The MRRU is now collecting and analyzing the half-yearly information of NGO-MFIs on the basis of this guideline.

With a view to giving the regulatory framework a formal and permanent shape the steering committee has prepared and submitted a draft law named “Microcredit Regulatory Authority Act - 2006” to the government. The proposed law, comprised of 52 articles, has been approved by the cabinet very recently and is now awaiting passage in the parliament. The new act proposes to form ‘Microcredit Regulatory Authority’ (MRA) as an independent legal body. No MFI will be allowed to carry out microcredit activities without the prior permission of this authority. All MFIs will have to apply for a certificate, which will allow them to provide microcredit to the authority within six months of the enactment of the new act. The MRA will reserve the right to refuse any application. It also will be given the power to discipline any delinquent institution. A Board of Directors consisting of eight members will work under the new authority. The Governor of the Bangladesh Bank will be the ex-officio Chairman of the Board. It is expected that the enactment of the proposed law will facilitate the growth of a transparent and accountable microfinance industry by effectively dealing with the constraints identified above.

4.6 Insurance 125

Importance of insurance industry in an economy emanates from the unique nature of services it provides to the economy. The principal function of insurers is to manage risk faced by individuals and companies, which enables households to acquire financial compensation when they are


156

126 The postal life insurance department and which was already in the state owned sector.

exposed to adverse events (e.g., death, illness, fires etc) and companies in management of financial activities by providing post-loss financing function. In this process insurance also generates positive externality in the economy -through covering the risk of asset-loss resulting from adverse events, and thus promotes investment and reduces underinvestment. Insurance industry not only manages the risks faced by individuals and companies but also mobilizes savings of the economy and allocates the funds to facilitate long term investment. Insurance industry can also play a critical role in the capital market of the country as a major institutional investor. Well developed insurance industry can boost economic growth and enhance economic stability of a country. On the other hand, economic growth can also increase demand for financial services such as insurance.

(a) The Evolution of the Insurance Industry in Bangladesh

Since the independence of the country, the insurance industry experienced a major structural transformation as it evolved from the dominance of SOEs to a more competitive market structure. After the independence of the country, the government of Bangladesh nationalized all the insurance companies except the foreign life insurance companies, by the Bangladesh Insurance Nationalization order 1972, under which five corporations were established.126 The Jatiya Bima Corporation (National Insurance Corporation) was in charge of controlling and supervising the four subsidiary corporations; where two of them were in charge of operating life insurance business, namely, Rupsa and Surma Jiban Bima Corporation, while the other two, Tista and Karnafuli Bima Corporation were exclusively assigned to operate general insurance business. Within this framework, the companies which were operating life insurance coverage only or the life insurance part of company businesses were incorporated in one of the two life insurance corporations. Likewise, specialist general insurance companies or general insurance part of company businesses, were incorporated in one of the two general insurance corporations. In 1973, the above arrangement was restructured by the promulgation of Insurance Corporation Ordinance 1973, which was later enacted as the Insurance Corporation Act, 1973. Following the Act, Jatiya Bima Corporation was abolished, and Rupsa and Surma Jiban Bima Corporation were merged to create Jiban Bima Corporation (life insurance company), JBC, and Sadharan Bima Corporation (general insurance company), SBC, was established by combining Tista and Karnafuli Bima Corporation.

In 1984, the government opened the door of both life and general insurance industry to the private sector entrepreneurs, with a view to


157

0

0.5

1

1.5

2

2.5

3

3.5

1999 2000 2001 2002 2003 2004

Bangladesh Pakistan Sri Lanka India

Figure 4.6.1Gross Premium Income as % of GDP

creating a competitive setting within which the industry would grow rapidly and provide better insurance services to both individuals and businesses. The insurance Act 1938, Insurance Rules 1958 and Insurance Corporation Act 1973, were amended to allow private sector to operate in the insurance business of the country. Between 1984 and 1990, 16 general and 3 life insurance companies were registered in the private sector, and the total number of private sector companies stood at 20 including the lone foreign life insurance company. Again in 1996, 8 more general and 2 more life insurance companies were permitted to operate insurance business in the private sector. At the end of 2001, the number of private sector insurance companies doubled, as the government allowed 30 more insurance companies (19 general and 11 life) to enter the business during the period 1999 to 2001. At present, 62 insurance companies are operating in both the life and non life insurance sectors in Bangladesh including the two state owned corporations, JBC and SBC.

(b) Insurance Industry of the country in International Perspective

Industrialized countries cover the most part of the world insurance market, with a share of 88.57 percent at the end of 2004. Asia covers around 22.61 percent share of the world market, where Japan alone accounts for 15.12 percent of the Asia’s share. Presently, the Insurance industry of the country accounts for only 0.01 percent of global insurance premium income, where India has a share of 0.65 per cent of the global market.

Insurance penetration measured by gross premium income as a percentage of GDP is very low in Bangladesh in comparison to other South Asian countries. From 1999 to 2004 the average gross premium income as share


158

Source: Swiss Re Sigma, World Insurance in 2004 and earlier issues.

Table 4.6.1Gross Premium Income of Life and General (Non life)

Insurance in % of GDP

Year 2002 2003 2004 2002 2003 2004 2002 2003 2004

Bangladesh 0.29 0.37 0.42 0.18 0.20 0.20 0.47 0.57 0.62

Pakistan 0.24 0.24 0.27 0.39 0.39 0.40 0.63 0.63 0.67

Sri Lanka 0.55 0.55 0.63 0.74 0.74 0.86 1.29 1.29 1.49

India 2.59 2.26 2.45 0.67 0.62 0.63 3.26 2.88 3.08

Industry Life Non Life Total Industry

of GDP was 2.7 percent in India, 1.27 percent in Sri Lanka and 0.65 percent Pakistan; it was 0.51 percent for Bangladesh. The economic significance of the industry is increasing over the last few years -in 2004 gross premium income reached 0.62 percent of GDP which is 0.05 percent less than that of Pakistan, while back in 1999, the Bangladesh figure was about two-third of that in Pakistan. From Table 4.6.1 it is also clear that India has a much developed life insurance market than that in other countries of the region. On the other hand, economic significance of insurance industry is very high in the developed countries of the world such as Japan, United States, and United Kingdom where the average gross premium income was 10.88, 9.15, and 13.99 in per cent of GDP from 1999 to 2004. Therefore there is greater scope for development of the sector not only in comparison to other developed countries of the world but also in comparison to other developing countries of the region.

Per capita premium income of the country is gradually increasing over the years, which has increased from 1.2 USD in 1999 to 2.5 USD in 2004, which was mainly contributed by the rise in per capita premium income in the life insurance sector. During the matching period per capita premium income in the life insurance sector increased from 0.6 USD in 1999 to 1.7 USD in 2004, where in the non life insurance sector it is still lower than one USD. Per capita premium income is much lower than that of India (19.7 USD) and Sri Lanka (14.20 USD) and marginally lower than that of Pakistan (4.0 USD). The office of the Chief Controller of Insurance (CCI) under the Ministry of Commerce is the regulatory agency of the insurance industry of Bangladesh, which is in charge of monitoring and supervising the operation of the industry. The office of the CCI regulates the industry as per the insurance Act, 1938, Insurance Rules, 1958 and Insurance Corporation Act, 1973 and various other acts.


159

0

5

10

15

20

25

1999 2000 2001 2002 2003 2004

Bangladesh Sri Lanka Pakistan India

Figure 4.6.2Premiums per capita in USD

Year 2002 2003 2004 2002 20032004 2002 20032004

Bangladesh 1.0 1.4 1.7 0.6 0.7 0.8 1.6 2.1 2.5

Pakistan 1.0 1.1 1.6 1.7 1.8 2.4 2.7 2.9 4.0

Sri Lanka 4.5 5.3 6.0 6.1 7.1 8.2 10.6 12.4 14.2

India 11.7 12.9 15.7 3.0 3.5 4.0 14.7 16.4 19.7

Industry Life Non Life Total Industry


Table 4.6.2 Insurance Density: Premiums per capita in USD

(c) Capital Market Performance of the Insurance Industry

In 2005, a significant number of insurance companies floated IPOs in the capital market. A total of seventeen companies floated IPOs in the year including the ten companies from the insurance sector, which is mainly driven by the legal requirements of the industry. These insurance companies floated IPOs worth BDT 1,150 million in 2005. During the same period six insurance companies listed with the DSE. At present 27 insurance companies are listed with the DSE. DSE sector wise market capitalization show that the share of insurance sector in the total market capitalization has declined from 4.13 percent in 2004 to 3.74 percent in 2005, while the share of banking sector increased from 46.60 percent to 52.00 percent during the corresponding period. Over the last few years, average dividend declared by the insurance sector also shows a continuous downward trend, which has declined from 18.16 percent in

127 Closing price / earning per share, which determines the time an investor needs to wait to get back the investable amount, (DSE Monthly Review, December, 2005)128 Daily observations of CSE sector wise indexes are collected from the CSE, from which observations of a particular day of each week are taken.


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Figure 4.6.3CSE Sector-wise Index from March 2005 to Jan 2006 (Weekly)128

2003 to 6.68 percent in 2005. On the other hand, the insurance sector accounted for 5.63 percent share of total DSE turnover in 2005, which was only 0.74 percent during the year 2004. Weighted average of the price-earning (P-E) ratio of the insurance sector declined from 26.92 in 2004 to 20.87 in 2005, which is still higher than that of 2003 (12.36).127

CSE sector-wise indexes show that stock index for the insurance sector has declined by around 15 percent in January 2006 since the first week of March 2005, with marginal fluctuations over the same period. On the other hand, the price index of the banking sector has increased by about 17 percent, and of Leasing & Finance and Pharmaceuticals & Chemicals sector has declined by 16.7 and 17.8 percent respectively, over the same period.

(d) Premium Income

Yearly growth rate of real gross premium income of the insurance industry increased from 14.79 percent in 2003 to 20.18 percent in 2004. The insurance industry has recouped its growth momentum in 2004 after experiencing a slow down during 2002 to 2003. This slowdown in the industry growth rate is mainly due to a significant fall in the growth rate of non-life insurance industry. In 2002 the growth rate of non-life insurance business declined to around 6.0 percent from around 12.0 percent in 2001, which deteriorated further to just over 5.0 percent in 2003.

129 At present, JBC manages 6 regional, 10 zonal, 61 sales and 365 branch offices all over the country. 130 In the wake of declining market share, JBC has designed a new business plan to enhance its competitive capacity and stimulate growth. JBC plans to introduce special life insurance schemes for expatriate Bangladeshis.


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0

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2001 2002 2003 2004

% G

row

th

General Life Total

Figure 4.6.4Growth of Real Gross Premium Income

Sector Private JBC Total Private JBC Total Private JBC

2001 25.9 14.6 23.1 24.0 12.8 21.2 76.6 23.4

2002 28.6 -8.8 19.8 24.6 -11.6 16.1 82.2 17.8

2003 28.0 8.4 24.5 22.4 3.7 19.1 84.5 15.5

2004 33.0 1.4 28.1 27.6 -2.7 22.9 87.7 12.3

Growth(Nominal)

Growth(Inflation Adjusted) Share

Source: Calculated from Annual Reports of Bangladesh Insurance Association

Table 4.6.3Growth in Premium Income in the Life Insurance Industry

In the life insurance industry, the state owned Jiban Bima Corporation (JBC) has been steadily losing its market share despite its largest network all over the country, due to significant growth of private sector life insurance companies coupled with fall in premium income of the JBC.129 The state owned life insurer experienced a sharp fall in premium income during the year 2002, which caused a rapid decline in its market share from 23.4 percent in 2001 to 17.8 percent in 2002 according to the figures provided by Bangladesh Insurance Association. The state owned company again suffered negative growth in real terms during the year 2004. 130

On the other hand, real gross premium income of private sector life insurance companies increased by 27.61 percent in 2004, which is higher than the average growth rate of 2001-03 periods. Over the last few years the introduction of various micro insurance schemes by different life insurance companies contributed to the high growth of premium income in

131 Calculated from the figures provided by the office of the Chief Controller of Insurance (CCI).


162

Source: Calculated from Annual Reports of Bangladesh Insurance Association

Table 4.6.4Growth in Premium Income of General Insurance Industry

Private SBC Total Private SBC Total Private SBC

2001 12.52 22.95 14 10.77 21.04 12.26 84.4 15.6

2002 9.87 7.84 9.6 6.46 4.5 6.16 84.6 15.4

2003 13.28 -6.36 10.3 8.37 -10.41 5.48 86.9 13.1

2004 21.84 1.57 19.2 16.89 -2.56 14.35 88.9 11.1

Growth(Nominal)

Growth(Inflation Adjusted) Share

the private sector. Premium income analysis of a leading private sector domestic life insurance company shows that, in 2004 almost 48 percent of its premium income growth is contributed by its micro insurance scheme, which was 26 percent in 2003. The private sector life insurance business is dominated by the large market players; however, there was a changing trend in the competitive structure of the market over the last few years. Combined share of gross premium income of the three major market players, those were registered before the end of 1986, has fallen from around 77 percent in 2001 to 63 percent in 2004, while the share of the other three companies those were registered during 1990 to 1996 period has increased from around 11 percent in 2001 to 14 percent in 2004. At the same time, the remaining 11 companies registered during 1999 to 2000 period have increased their combined market share from 11.5 percent in 2001 to 22.5 percent in 2004.131

State owned Sadharan Bima Corporation (SBC) is also losing its market share over the years; in 2004 its share in total premium income of the general (i.e., non-life) insurance industry reached 11.1 percent, which was around 15 percent during the period 2001-02. The overall non-life insurance sector experienced a slowdown during the 2002 to 2003 period, where premium income growth of private sector companies declined to one digit level. In 2004, the gross premium income of private sector general insurance (non-life) companies increased by 21.84 percent and that of SBC decreased by 2.56 percent in real terms.

Competition enhances efficiency of the market and leads to product diversification and fair pricing of insurance products. However, it is alleged that presence of a large number of general insurance companies in a small market is creating hindrance in smooth functioning of the overall insurance

132 BIA (2004, 2003) and some independent credit rating institutions opined the view. 133 Asset and Investment of Public Sector Life Insurance Company is not available for the year 2004. 134 Note: Growth figures are adjusted for Inflation. "(-)" indicates figures not available.


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Asset

Share Growth

Category Investment

2000 69.2 30.8 24.8 - - 66.5 33.5 32.8 - -2001 71.9 28.1 23.7 8.4 19.0 71.1 28.9 39.412.8 30.52002 75.2 24.8 24.1 4.7 18.6 74.0 25.9 23.3 6.318.352003 77.5 22.5 20.5 5.9 16.9 76.8 23.3 22.7 5.818.282004 - - 23.0 - - - - 26.1 - -

Share Growth Indicator

Sector Privatesector JBC Private

sector JBC Total Privatesector JBC Private

sector JBC Total

Source: Calculated from Annual Reports of Bangladesh Insurance Association (Various Issues).

Table 4.6.5Asset and Investment of Life Insurance Companies134

industry.132 Over the last one and a half years, the SEC rejected 28 IPO proposals of various companies as they submitted flawed documents, regrettably, 21 of these companies are from the insurance industry. The rejected applications of insurance companies comprises of 14 general insurance and 7 life insurance companies. Reasons behind these huge rejection of IPO proposals also includes non fulfillment of commission’s requirements, accumulated losses and negative profitability of the companies.

(e) Asset and Investment

Total assets of the life insurance industry have been growing steadily over the last few years, where the private sector maintained an average growth of 23.22 percent during 2000-2004. Available data also shows that JBC maintained a steady growth rate of 6.41 percent between 2001 to 2003 period, which helped the life insurance industry to experience a consistent asset growth. Asset structure of the life insurance industry shows that asset share of the public sector life insurance company, JBC, is steadily declining over the years. The share of the public sector company in the total asset of life insurance industry has declined from 30.78 percent in 2000 to 22.45 percent in 2003. 133

Investment composition of life insurance industry also shows a similar pattern with a steady fall in the share of the public sector in total investment of the industry. In 2004, investment of the private sector life insurance


164

Asset

Share Growth

Investment

2000 63.5 36.5 - - - 49.2 50.9 - - -

2001 63.5 36.5 5.8 6.0 5.9 52.0 48.0 12.6 0.6 6.5

2002 64.6 35.4 1.4 -3.2 -0.3 59.4 40.6 19.0 -12.0 4.1

2003 65.2 34.8 3.3 0.4 2.2 63.6 36.4 8.7 -8.9 1.6

2004 63.8 36.2 -3.6 2.7 -1.4 66.1 34.0 29.3 16.0 24.5

Share Growth

Asset Privatesector SBC Private

sector SBC Total Privatesector SBC Private

sector SBC Total

Source: Calculated from Annual Reports of Bangladesh Insurance Association (Various Issues).

Table 4.6.6Asset and Investment of General (Non life) Insurance companies

companies increased by 26.1 percent in real terms, which is higher than the average growth rate of 2002 to 2003 period but below the average growth of 2000 to 2001 period. Available figures of the public sector life insurance company show that investment by the public sector company increased by 5.8 percent in real terms during 2003, which is lower than the previous two years.

The asset structure of the non-life (general) insurance industry remained unchanged over the last few years, such that the public sector insurance company retained its share around 36 percent. In 2004, the public sector company raised its total assets by 2.7 percent in real terms, while the private sector assets declined by -3.6 percent over the previous year. As a result, the share of private sector in the total assets of general insurance companies declined from 65.23 percent in 2003 to 63.79 percent in 2004 and the share of public sector improved from 34.8 percent in 2003 to 36.2 percent in 2004. Total asset growth of the industry has been inconsistent during the 2001 to 2004 period.

However, there was a high growth in investment by the private sector general insurance companies, which resulted in the steady rise of the share of private sector in total investment. Total investment of private sector life insurance companies registered a growth of 29.30 percent in 2004 over 2003. In 2004, total investment of SBC also increased by 16.01 percent over the previous year, following the successive years of the negative growth. Generally insurance companies follow conservative approach in designing investment portfolios. In Bangladesh investment portfolios of insurance companies generally comprises of Govt. Securities and Bonds, Fixed Deposit with different banks, Shares and Debentures, Equity Shares, Real Estates etc. Insurance industry can play a critical role in the development of the capital market of the country being the largest

135 GOB and WB (2004), ADB (1996), BIA (2004, 2003) discussed the issue in details.


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institutional source of capital. Increasing participation of institutional investors can revive the capital market from its stagnant situation. As a large proportion of the investment of the insurance companies consists of Share and Debentures and real estate, profitability of the companies is affected by the ups and downs of the capital market and real state prices.

It would appear from different studies on the insurance industry that the regulatory agency of the insurance industry is not equipped with adequate manpower and resources to supervise the growing industry of today, thereby limiting the role of the supervisory authority in the development of the sector.135 The office of the Chief Controller of Insurance (CCI) should recruit competent professionals who will be able to analyze financial soundness of the companies and prepare financial reports or background papers for taking appropriate measures. The office of the supervisory authority should also be equipped with proper logistical support such as computer facilities, internet connections, which will enhance the efficiency of everyday work. It would be very helpful were the office of the CCI to produce an extensive annual report each year, describing present problems and prospects of the industry. Such a report should also cover yearly balance sheet analysis of each company (e.g., earnings and profitability ratio), including their trend over the year.

At present there is no unique reinsurance company in the country, which can provide specialized reinsurance services to the life and general insurance companies of the country. As a result insurance companies are facing problems in dealing with the reinsurance facilities. The BIA is of the view that state owned SBC, which lacks in efficient professionals, is not competent in dealing with the reinsurance matters of general insurance companies. The report also noted that life insurance companies are also facing problems in arranging their reinsurance due to refusal from the major insurer of the world and the Jiban Bima Corporation. According to the BIA annual report, a six member committee headed by the Chief Controller of Insurance is studying the structure and requirements of the industry in order to recommend to the feasibility of setting up a reinsurance company.

Recently the Government of Bangladesh and ADB has signed a deal for a project to improve good governance in the capital market and insurance sector of the country. ADB will finance 3 million USD (75 percent) of the project’s total estimated cost and the remaining 25 percent will be shouldered by the GOB. Besides strengthening the regulation and


166

supervision of the capital market and capacity of the regulators, the project will also support the government-led reform programs in the insurance sector.

(f) Conclusion

Insurance is an important part of the financial system; inefficiency of the industry can impede the development of the overall financial system of the country. Growing importance of the insurance industry in the financial system and its increasing economic significance in other developing countries highlights the fact that, the industry needs a closer attention for its future development. As different sectors of the financial system are closely related to each other, risks of a particular sector can easily transmit to the other sectors of the system. Therefore effective monitoring and supervision of the insurance industry is crucial not only to guide the industry in efficient management of risks faced by economic agents but also to mobilize long term savings of the economy, and thereby allocate the funds to facilitate long term investment. The recently signed ADB project for the development of the capital market and the insurance industry is expected to enhance good governance in the insurance industry under an efficient regulatory environment. In the coming years the insurance industry is expected to go through a series of reform measures including upgrading its legislation and the regulatory system.

References

Alam, Md. Nurul and Jahan, Sayeeda Bilquis (1996), "Impacts of Stock Market Debacle in 1996 on National Economy of Bangladesh", Bank Parikrama Vol. XXI, Nos. 3 & 4, September and December, 1996.

Ali, K. Md. M (2004), “Poverty Alleviation and Need for Mutual Micro Insurance for The Poor,” Insurance Journal, 55, 17-147.

Annual Report 2004-2005, Bangladesh Bank.

Banerjee, P. K. and Ashraf al Mamun (2003), “Lease Financing in Bangladesh”, BIBM Research Paper.

Bangladesh Bank (2006). Annual Report 2004-2005, Bangladesh Bank

Bangladesh Bank Quarterly, Vol. III, No.1, July – September 2005.

Central Bank of Sri Lanka (2006). Financial Stability Review , 2005.

CDF (2005), Microfinance Statistic.

Dhaka Stock Exchange Ltd. (2005). Monthly Review, December 2005 and Year End Special Edition, December 2005, Vol. 20. No. 12.


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Government of the People’s Republic of Bangladesh (2004), The World Bank and The First Initiative, “A Review and Proposals for Reform of the Insurance Laws in Bangladesh.”

Kazemi, M. A. M., (May 1998), “Financial Sector Reforms: The Bangladesh Experience,” Country Paper for ESCAP Seminar on Improved Management of the Financial Sector.

Khaleque, S.A. (June 1998), History of Insurance, Bangladesh Insurance Academy, Dhaka.

Leasing in Emerging Markets (1996), IFC, Lessons of Experience Series 3.

Managing “Insurance Business in a Free World”, The Bangladesh Observer, January 31, 2004.

MIX (2005), Performance and Transparency: A Survey of Microfinance in South Asia, available at

http://www.mixmarket.org/medialibrary/mixmarket/SouthAsia_MicrofinanceSurvey

MIX (January 2006), Microfinance Institutions in Developing Countries-a View of the Landscape, Program-Related Investments Conference, Palo Alto, CA.

Morduch, J. and B. Armendáriz de Aghion (2005). The Economics of Microfinance, MIT press.

Rashid and Matsaert (Undated), Microfinance and the Poor- an Overview of the Sector in Bangladesh, available at

http://www.livelihoods.org/lessons/docs/Asia_Workshop_pdf/ARLW_RasPjtMat.pdf

The World Bank and International Monetary Fund (2005), Financial Sector Assessment, A Handbook, The World Bank, Washington.

Uddin Md. S., Kabir Md. A. (July 1998), “Asset Structure of private General Insurance companies in Bangladesh, Insurance Journal, 55, 117-147.

World Bank (2005), The Economics and Governance of Non-Government Organizations (NGOs)in Bangladesh, available at http://www.lcgbangladesh .org/NGOs/reports/NGO_Report_clientversion.pdf


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1 Industrial Promotion and Development Company of Bangladesh Ltd (IPDC) 19812 Saudi-Bangladesh Industrial and Agricultural Investment Company Ltd (SABINCO) 19843 Industrial Development leasing Company of Bangladesh Ltd (IDLC) 19854 The UAE Bangladesh Investment Company Ltd 19895 United Leasing Company Ltd (ULCL) 19896 Phoenix Leasing Company Ltd 19957 Uttara Finance and Investment Ltd 19958 International Leasing and Financial Services Ltd (ILFSL) 19969 GSP Finance Company (Bangladesh) Ltd. 199610 Prime Finance and Investment Ltd. 199611 Oman Bangladesh Leasing and Investment Company Ltd 199612 Bay Leasing and Investment Ltd 199613 Peoples Leasing and Financial Services Ltd. 199614 First Lease International Ltd 199615 Delta BRAC Housing Finance Corporation Ltd (DBH) 199616 LankaBangla Finance Ltd. 199717 Infrastructure Development Company Ltd (IDCOL) 199718 Bangladesh Industrial Finance Company Ltd (BIFC) 199819 Union Capital Ltd (UCL) 199820 National Housing Finance and Investments Ltd 199821 Midas Financing Ltd (MFL) 200022 Bangladesh Finance and Industrial Company Ltd (BFIC) 200023 Industrial and Infrastructure Development Finance Company Ltd (IIDFCL) 200124 Islamic Finance and Investment Ltd (IFIL) 200125 Fidelity Assets and Securities Company Ltd 200126 Fareast Finance and Investment Ltd 200127 Premier Leasing International Ltd 200228 Self Employment Finance Ltd 2002

Year ofCommencement Name of Non-Bank Financial Institution

Appendix 4.1The Listing of NBFIs (as of December 2005)

1999 2000 2001 2002 2003 2004

Bangladesh 1.2 1.40 1.60 1.60 2.10 2.50 Pakistan 2.8 2.80 2.70 2.70 2.90 4.00 Sri Lanka 9.5 10.20 9.70 10.60 12.40 14.20 India 8.6 9.90 11.50 14.70 16.40 19.70 Japan 3908.9 3973.30 3507.50 3498.60 3770.90 3875.40 South Korea 1022.8 1234.10 1060.10 1159.70 1243.00 1420.00United Kingdom 3244.3 3759.20 4195.10 3879.10 4058.50 4484.40 United States 2921 3152.10 3266.10 3461.60 3637.70 3790.20

(ii) Insurance Density: Premiums per-capita in USD

1999 2000 2001 2002 2003 2004 (99-04) Average

Bangladesh 0.43 0.49 0.47 0.47 0.57 0.60 0.51 Pakistan 0.65 0.64 0.68 0.63 0.63 0.67 0.65 Sri Lanka 1.14 1.21 1.2 1.29 1.29 1.49 1.27 India 1.92 2.32 2.71 3.26 2.88 3.08 2.70 Japan 11.17 10.92 11.06 10.86 10.81 10.48 10.88 South Korea 11.28 13.05 12.07 11.51 11.14 9.71 11.46United Kingdom 13.35 15.78 14.18 14.75 13.37 12.50 13.99 United States 8.55 8.76 8.97 9.58 9.61 9.44 9.15

Appendix 4.2Insurance Penetration and Density

(i) Insurance Penetration: Premiums in % of GDP


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