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 indicators, along with the effects of banks’ entry into the non-bank

financing area. In addition, non-bank financial sector is important to increase the

mobilization of term savings and for the sake of providing support services to the capital

market. The focus of this paper is to highlight the necessity and importance of NBFIs to

strengthen the financial system for rapid economic development of the country. Special

emphasis has been given to identify the challenges faced by NBFIs in Bangladesh. And

finally, development of NBFIs as well as their role in strengthening the financial system

of Bangladesh has been discussed. It is found that despite several constraints, the

industry as a whole is performing reasonably well. Given appropriate support, NBFIs

will be able to play a more significant role in financial intermediation.

1

Abstract

TABLE OF CONTENTS

Sl no. Topics Page no

1 Introduction 4

2 Industry definition 4

3 Services provided 5

4 Emergence of NBFIs in Bangladesh 6

5 Classification 6

6 Ownership pattern 7

7 Market capitalization 10

8 The business cycle and industry sectors 11

9 Some economic variables and effect of their changes in

different industries

15

10 Global industry analysis 18

11 Major players in NBFI sector 19

12 NBFI tax structure 19

13 Valuation of socks in NBFI 20

14 Key success factors 21

15 Driving forces 22

16 Highlights of major events 24

17 Bank’s entity in Non Banking Financial activity 26

18 Challenge issues for NBFI 27

19 Suggested alternatives 30

2

20 Conclusion 32

21 References 33

22 Annexure : listing of NBFI 35

31. Introduction

on-Bank Financial Institutions (NBFIs) play a significant role in meeting the diverse

financial needs of various sectors of an economy and thus contribute to the economic

development of the country as well as to the deepening of the country’s financial

system. According to Goldsmith (1969), financial development in a country starts with the

development of banking institutions. As the development process proceeds, NBFIs become

prominent alongside the banking sector. Both can play significant roles in influencing and

mobilizing savings for investment. Their involvement in the process generally makes them

competitors as they try to cater to the same needs. However, they are also complementary to each

other as each can develop its own niche, and thus may venture into an area where the other may

not, which ultimately strengthens the financial mobility of both.

N

NON-BANK FINANCIAL COMPANY

Non-bank financial companies (NBFCs) are financial institutions that provide banking services

without meeting the legal definition of a bank, i.e. one that does not hold a banking license.

These institutions are not allowed to take deposits from the public. Nonetheless, all operations of

these institutions are still exercised under bank regulation. However this depends on the

jurisdiction, as in some jurisdictions, such as New Zealand, any company can do the business of

banking, and there are no banking licenses issued.

NON-BANK FINANCIAL INSTITUTION

4

2. Industry Definition

A non-bank financial institution (NBFI) is a financial institution that does not have a full banking

license or is not supervised by a national or international banking regulatory agency. NBFIs

facilitate bank-related financial services, such as investment, risk pooling, contractual savings,

and market brokering.[1] Examples of these include insurance firms, pawn shops, cashier's check

issuers, check cashing locations, currency exchanges, and microloan organizations.

NBFCs offer all sorts of banking services, such as loans and credit facilities, private education

funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs

and other obligations. These institutions also provide wealth management such as managing

portfolios of stocks and shares, discounting services e.g. discounting of instruments and advice

on merger and acquisition activities. The number of non-banking financial companies has

expanded greatly in the last several years as venture capital companies, retail and industrial

companies have entered the lending business. Non-bank institutions also frequently support

investments in property and prepare feasibility, market or industry studies for companies.

However they are typically not allowed to take deposits from the general public and have to find

other means of funding their operations such as issuing debt instruments

5

3. Services provided

4. Emergence of Non-Bank Financial Institutions in Bangladesh

Initially, NBFIs were incorporated in Bangladesh under the Companies Act, 1913 and were

regulated by the provision relating to Non-Banking Institutions as contained in Chapter V of the

Bangladesh Bank Order, 1972. But this regulatory framework was not adequate and NBFIs had

the scope of carrying out their business in the line of banking. Later, Bangladesh Bank

promulgated an order titled ‘Non Banking Financial Institutions Order, 1989’ to promote better

regulation and also to remove the ambiguity relating to the permissible areas of operation of

NBFIs. But the order did not cover the whole range of NBFI activities. It also did not mention

anything about the statutory liquidity requirement to be maintained with the central bank. To

remove the regulatory deficiency and also to define a wide range of activities to be covered by

NBFIs, a new act titled ‘Financial Institution Act, 1993’ was enacted in 1993 (Barai et al. 1999).

Industrial Promotion and Development Company (IPDC) was the first private sector NBFI in

Bangladesh, which started its operation in 1981. Since then the number has been increasing and

in December 2006 it reached 29.1 Of these, one is government owned, 15 are local (private) and

the other 13 are established under joint venture with foreign participation.

Depending upon their nature of activities, non- banking finance companies can be classified into

the following categories:

1. Development finance institutions

2. Leasing companies

3. Investment companies

4. Mudaraba companies

5. House finance companies

6. Venture capital companies

6

5. Classification

7. Discount & guarantee houses

The ownership pattern of NBFIs, nature of activities and share percentages are in below:

Ownership

pattern

Name of

NBFIs

% of local Share

foreign

Govt. Nature of

Activities

Govt.

(100%)

1 IDCOL - 100 Leasing,

Project

fiancing

Local-

Private

2 PLC 100 - - Leasing

3 UCL 100 - - Leasing,

Investment

Banking

4 PFIL 100 - - Leasing,

Investment

& Merchant

Banking.

Housing

5 BLIL 100 - - Leasing,

Merchant

banking

6 PLFSL 100 - - Leasing

7

6. Ownership Pattern

7 NHL 100 - - Housing

8 MIDAS 100 - - Loan

9 FLIL 100 - - Loan

10 BFIL 100 - - Investment

Banking

11 IIDFCL 100 - - NA*

12 Islamic

Finance

100 - - NA*

Joint

Venture

13 ULCL 28 60 12 Leasing

14 IDLC 46.8 45 8.11 Leasing,

Loan,

Merchant

Banking

15 SABIN CO 50 50 - Loan,

Investment

& Merchant

Banking

16 UFIL 25 25 50 Leasing,

Merchant

Banking

17 UAEBIC 40 60 - Loan,

Investment

18 ILFS NA Leasing

Loan

19 GSP-FCL 14 76 - Leasing,

8

Merchant

Banking

20 BBFIL 70 30 - Leasing,

Loan

21 DBH 70 30 Housing

22 VANIK 70 30 - Leasing,

Investment,

Merchant

Banking

and

Housing

Finance

23 BIFL NA Leasing

24 IPDC 30 70 - Leasing,

Loan,

Investment.

25 FA NA NA*

Data Source –BB, NBFIs

*NA- Not available

9

7. Market Capitalization and Listed Securities

The total market capitalization at DSE reached Tk. 1,043.8 billion in December 2008 with 412

listed securities consisting of 276 companies, 16 mutual funds, eight debentures, 111

Government bonds, and one corporate bond. The capital market reached new heights in terms of

market capitalization. At the end of 2008, market capitalization at DSE was 19.3 percent of the

country's GDP compared with 15.7 percent in December 2007. During 2008, total issued capital

rose by Tk. 33.2 billion of which Tk. 16.5 billion was through bonus and right issues and Tk.

16.7 billion was by new issues. During the year, 15 companies were listed in DSE of which five

were listed through the direct listing route. In terms of sect oral composition, the financial sector

(including banks, investment and insurance) continues to hold the majority share in total market

capital capitalization at DSE: 55.6 percent as compared with 24.6 percent for manufacturing and

19.5 percent for service and miscellaneous sector in December 2008. The share of the financial

sector in total market capitalization was 64.2 percent in December 2007.

10

Figure: Sector-wise Composition of Market Capitalization in DSE

Note: Figures in parentheses show the share of the sub-sectors in total market capitalization of

listed companies.

Source: The Monthly Review, Dhaka Stock Exchange, December 2008.

Industry performance can be largely affected by economic trends. This economy can be

monitored by identifying and monitoring the key economic variables, different assumptions and

theories. There are some other measures like – gathering up new information about economic

outlook and conducting various analysis of relevant industry on the basis of accumulated

information.

11

8. THE BUSINESS CYCLE AND INDUSTRY SECTORS

Economic trend basically falls in following two basic categories –

Cyclical change

Structural change

Cyclical change: this sort of change arises from the fluctuation (ups and downs) of the

business cycle.

Structural change: this sort of change occurs when an economy undergoes through major

structural reform and functional change. Transition of United States from manufacturing

to service economy or transition from social to market economy are he popular examples

of structural changes.

INDUSTRY PERFORMANCE IN BUSINESS CYCLE

It is believed by various experts that, industry performance is very much related to the different

stages of business cycle. And these stages make the analysis of industry challenging. As the

cycle rotates or fluctuates it also creates variation in analysis of performance. So, it is important

to realize the position of that industry first in the business cycle before forecasting or analyzing.

If anyone takes into account the history only then he will miss the changing trend of that industry

and definitely the forecasting will contain substantial misstatements.

Her, another thing should also be mentioned that, sometimes , switching from one industry group

to another also takes place in a business cycle which is known as Rotation Strategy. In this case

also, it is necessary to determine the position of industry in the business cycle. If it ensures that,

the next stage of business cycle is going to benefit the industry group, only then the investors

should go for that industry group and need to identify and monitor the key variables related to

the economic trends.

12

The figure presents a graphic of which several industries perform well in several stage of

business cycle.

TOWARD THE END OF A RECESSION

No Impact Reason

1 Financial stock value soars Investors anticipates that

- banks earnings will rise

- both economy and loan recover

2 Brokerage house become attractive

investments

Sales and earnings of brokerage houses are

expected to rise because

- Investors trade securities

- Businesses sell debt and equity.

3 consumer staples outperform others Actually consumer staples are irrelevant with

recession or boom. If the overall spending declines

at a higher rate, people will still spend for food,

pharmaceuticals, beverages.

13

WHEN THE RECESSION ENDS

No Impact

1 Increase in loan demand

2 Increase in house construction

3 Increase in security offering

AT THE BEGINNING OF RECOVERY LEVEL

No impact Reason

1 Consumer durable industry (car,

PC, refrigerator etc)experiences

boom

A reviving economy increases

- Consumer confidence

- personal income

2 Capital goods industries

flourishes

When the economy recovers, people think about

- modernizing

- renovating

- purchasing capital goods

3 Cyclical industries become

attractive investments

High degree of operating leverage makes this industry

lucrative.

AT THE PEAK OF BUSINESS CYCLE

No Impact reason

1 Rate of inflation increases Demand surpasses the supply

2 Basic material industries becomes

investors favorite

Inflation has little influence on the cost o extracting

those products and they can

- increase price

- ensure higher profit margin.

If a weak domestic economy cause weak currency, industries with large export components to

growing economies may benefit because their goods become more cost competitive in the

overseas market.

14

INFLATION

NO INDUSTRY IMPACT REASON

1 Stock market Negative Inflation causes

- higher market interest rate

- increases uncertainty about future price and

cost

- harm to ims those can not pass through their

cost increase

2 Natural resources Positive If production cost do not ise with inflation they can

likely to sell their output at a higher price

3 Industries having

high operating

leverage

Benefit - their costs are fixed with nominal terms

- revenue increase with inflation

4 Industries with

high financial

leverage

benefit Their debts are repaid in cheaper dollars

INTEREST RATE

No

.

INDUSTRIES IMPACT REASON

1 Financial

institutions

negative It is difficult o pass on the higher rates

to customers .

2 Housing and

construction

negative People get reluctant to spend

additional amount of money in this

sector

15

9. SOME ECONOMIC VARIABLES AND EFFECT OF THEIR CHANGES IN DIFFERENT INDUSTRIES

3 Do-it-yourselfer

supplier

positive

4 retirees positive As retirees’ income depends on the

interest, it increases their income

INTERNAIONAL EONOMICS

The fluctuation of dollar or euro or other currency may cause significant variation in recognition

of revenue in the international export/import business

CONSUMER SENTIMENT

Optimistic consumers are more wiling to spend money for expensive goods like- house, car,

furniture etc. therefore performance of consumer cyclical industries will be affected by changes

of

- consumer sentiment

- Consumers’ willingness and ability to borrow and spend money.

STRUCTURAL ECONOMIC CHANGES AND ALTERNAIVE INDUSTRIES

Apart from the factors described below, there are some other important factors which have

significant impact on the cash low and risk prospect of different industries, like-

DEMOGRAPHICS

Demography has a large impact on a country’s consumption in several issues like

- Advertizing

- House construction

- Health care

16

- Social security and so on.

AND POPULATIONS OF DIFFERENT AGE HAVE DIFFERENT USAGE TO THE ECONOMY

No Population type Impact

1 Young people - Adequate storage of entry level workers

- Decreasing labor cost

- Resource person available for replacing the

retiring person

2 Senior citizen - Save more

- Invest their savings. Therefore good or financial

industries

LIFESTYLES

Consumer behavior is highly affected by trends and fads. And sales in several industries have

affected from exercise of consumer wide variety of choices.

No Consumer choice Affected industries

1 Junk food Restaurants, fast food shops

2 Private residence Housing and real state

3 Private transport Automobile

4 Dual career families Day care center

TECHNOLOGY

Trends in technology can affect numerous industry factors. For example, demand has fallen for

carburetors and shifted electronic fuel injection due to advancement of technology.

Information super highway is becoming a reality and encouraging linkages between

telecommunication and cable television system. Changes in technology have spurred capital

spending in technological equipments as a mean to gain competitive advantage. Retailing

industry has become a user of new technology. It helps retailing business to be more

17

decentralized and geographically diversified. Major retailers use bar-code scanning to speed up

the check out process. EDI allows the retailers to connect with the suppliers electronically and to

order new inventory and pay accounts payable EFT allows moving funds quickly and easily

through local banks and headquarters

POLITICS AND REGULATIONS

Today’s social value may be tomorrow’s law – as political change reflects social values. Some

impacts of political change on business are as follows

- Heavy regulation of an industry can result in increasing firm’s cost but restricts entry to

the industry.

- Changing regulation of industry brings participants of financial service industries

together

- Political regulations and law affect international commerce – trade laws, tariffs,

embargoes and other trade barriers.

In the era of globalization, so many firms of different industries are involved in the foreign

market as well as foreign firms are also doing business In our country. That is necessary to

consider the effects of foreign firms on industry returns.we must extend analysis to include

global factor.

Following major factors are needed to be analyzed in this respect

18

10. GLOBAL INDUSTRY ANALYSIS

The macro environment of the parent country and the demand in the subsidiary country

Accounting differences by different countries.

Effect of currency exchange rate trends

Socio –political factors, barriers etc.

In summary, it is necessary to consider global factors while analyzing industry.

In NBFI sector of Bangladesh, there exists 29 NBFIs and their major players are as follows-

Bangladesh Bank

Securities & Exchange Commission

Inter bank call money market

Existing applicanle rules, regulation, laws and acts.

The standard rate of corporate tax in Bangladesh is 27.5% in 2010 - 2011 tax year. This is the

standard corporate tax rate applicable to publicly traded companies in Bangladesh, a list

including tax rates for other corporations are as follows:

No

.

Industry sector Tax rate

1 Publicly Traded Company   27.5%

19

11. MAJOR PLAYERS IN NBFI SECTOR

12. NBFI INDUSTRY TAX STRUCTURE

2 Non-publicly Traded Company   37.5%

3 Bank, Insurance & Financial Company     42.5%

4 Mobile Phone Operator Company      45%

5 Publicly Traded Mobile Operator Company  35%

Following system is applicable in valuation of stocks in NBFI-

COMPARABLE INDUSTRY MULTIPLE

Valuation using multiples is a method for determining the current value of a company by

examining and comparing the financial ratios  of relevant peer groups, also often described

as comparable company analysis. The most widely used multiple is the price-earning ratio(P/E

ratio or PER) of stocks in a similar industry. Using the average of multiple PERs improves

reliability but it can still be necessary to correct the PER for current market conditions.

P/E multiples are popular in part due to their wide availability. The value of a business should,

however, be reflected in multiples based on enterprise value of a company. These multiples

reveal the rating of a business independently of its capital structure, and are the most commonly

used in transactions on private companies.

Formula:

20

13. VALUATION OF STOCK IN NBFI

Condition: Peer company is profitable.

Rf = discount rate during the last forecast year tf = last year of the forecast period. C = correction

factor P = current stock Price NPP = net profit peer company S = number of shares NPO = net

profit of target company after forecasted period.

And from recent study, it is found that

Non-bank financial institutions (NBFIs) have logged huge profits from the stock market in step

with banks, moving away from their core business. NBFIs recorded 25% growth in operating

profits in 2010. On average, 60% of the profits were generated through the capital market

operations. Some institutions earned as high as 80-90% of their profits from the stock business.

As the energy crisis slowed demand for industrial loans, NBFIs had no alternative avenues for

investment other than the stock market. Twenty-nine NBFIs are operating in the market and 21

of them are listed on the stock exchange. All these 29 NBFIs made combined operating profits

worth BDT 8.62 billion in 2010, 25% more than the profit in 2009. IDLC, Lanka Bangla and

Prime Finance, which are the market leaders in terms of business size, made most of their profits

from the capital market operations. Companies such as United Leasing and Uttara Finance

made the least from stock market business. Sensing increasing restrictions on NBFI's exposure to

the stock market, the companies are now thinking of alternative windows for income such as

SMEs and housing sector

1. Globalization: Today’s world is like a global village. Competition is more critical in a global

market. Globalization is the most important key success factors of NBFIs. NBFIs have to cope

with globalized competition to achieve the optimum success. Globalization increases the scope

of business of this sector in a large scale.

21

14. Key success factors:

2. Cost Efficiency: Cost efficiency means to reduce the cost and the same time to increase the

quality of the service. It means cost has to be reduced but the quality should not deteriorate when

reducing the cost.

3. Quality: Long term success of NBFIs can only be ensured by providing the required quality of

goods & services to the consumer. Without enhancing quality of service no NBFIs can survive in

the long run.

4. Increase Market Share: No company’s growth & development is not possible until & unless

it increases its market share. Market share means the coverage of markets segment of the

relevant industry by any particular company.

5. Advertisement: Advertisement is like the light-house of any company. It is advertisement that

introduces a company to all over the world and increases the consciousness of potential

consumers about the service or products of a company. By using the advertisement properly any

company can ensure it’s smooth success.

6. Marketing Mix: Marketing mix as a comprehensive business policy is a recent hallmark in

achieving business success. Marketing mix means the perfect combination of present and

potential marketing policy to increase the company’s identity throughout the world with a view

to increase revenue.

NBFIs are specialists of the intermediation process and their origins can be traced to the

development of specialized financial institutions. Some survived centuries of changing economic

and financial developments. Others appeared in response to special opportunities or needs and

have disappeared just as quickly. Their survival and existence depend upon their ability to (a)

offer contracts that serve the needs of specialized customers, (b) maintain a spread between the

22

15. Driving Forces

rate they pay for funds and the rate they receive that will support their costs, and (c) meet

commitment to suppliers of funds.

The non-bank financial sector has a wide diversity of institutions. Despite their importance as

alternative sources of finance to the commercial banks, their liabilities may nevertheless be

regarded as 'near money'.

The key driving forces of the NBFIs are as follows:

1. Product innovation: Innovation of new product & services leads any NBFIs to drive its

present business operation. Coping with new product or service is essential to survive in the

market. Obsolete product line cannot ensure smooth success.

2. Product Differentiation: No NBFIs should wait for innovating new services by other

institutions. They themselves should try to differentiate its present service or product line to

strengthen its market position. This force also leads the diversification of the sector’s institutions.

3. Changes in long term growth: Potential symptoms of changes in long term growth leads

diversification of institutions. It may be required by customer demand or regulations or by

competitors. Even the size of potential growth drives the institutions.

4. Business Contracting: Contracting with new & new businesses works as a key force to

diverse the sector. Business contracting may be required to change the framework of the

institutions. Different businesses have different types & nature of contracts that works as a driver

of the institutions.

5. Marketing Innovation: Innovation of modern marketing concept also drives the institutions.

The NBFIs have to realize and implement the developed marketing theory to compete. New

concepts lead the diversification of contemporary marketing policy.

6. Economies of Scale: To obtain the economies of scale, many NBFIs change its contemporary

business cycle and processes. Because economies of scale is a key success factor. And in some

cases after attaining the economies of scale many NBFIs diverse its operation of business.

23

7. Regulations: Most of the time different regulations imposed by controlling authority drive the

operations of the NBFIs. As there is no option to escape from the hand of regulation, the NBFIs

have to implement the changes required by the rules and regulations.

:

LARGE PROFITS FROM CORE BUSINESSES

Non-bank financial institutions (NBFIs) have logged huge profits from the Booming Stock

market from their core business.

They recorded 25 percent growth in operating profits in 2010, statistics show. On average, 60

percent of the profits were generated through the capital market operations alone.

PAID UP CAPITAL DOUBLE

The Bangladesh Bank directed non-bank financial institutions (NBFIs) to double their paid-up

capital to Tk 50 crore from the existing Tk 25 crore.

Central bank sets December 2010 deadline

24

16. HIGHLIGHTS THE MAJOR EVENTS

OPPORTUNITY OF TAKING FOREIGN LOANS

Recently The Central Bank said , Non-bank financial institutions (NBFIs) can now take foreign

loans only for funding manufacturing and infrastructure (except housing) sectors.

LIQUIDITY PRESSURE

NBFIs will come under fresh liquidity pressure between April and June in fiscal year (FY) 2010-

11 (FY11) when the government will be borrowing, at least, an amount of Tk 63.25 billion from

them.

BB TO BRING NBFIS UNDER BASEL-II FROM 2012

The Basel-II accord from January 2012 aiming at consolidating capital base of the country's

financial institutions. NBFIs would calculate minimum capital requirement under the Basel-II on

test basis from January 1, 2011 using the draft guideline.

25

The activities of NBFIs witnessed an impressive growth during the last five years. As per Section

7 of the Banking Companies Act 1991, commercial banks also started different activit ies offered

by NBFIs, specially leasing. The entry of banks in this sector is expected to brace the growth

momentum and will fill the gap in acquiring the institutional finance and serve the needs of the

industrial sector in the acquisition of capital assets. Commercial banks worldwide are directly or

indirectly involved in activities such as leasing, hire purchase, term lending, house financing and

capital market operation. In developed countries commercial banks are also actively involved in

different activities other than banking. In Turkey, banks are empowered to arrange lease finance

by virtue of special laws relating to this particular activity. Following the deregulation of the

local banking system as well as diversification of business, a number of banks in Taiwan

established their own independent leasing companies (Chen 2001). In India, commercial banks

are permitted to transact leasing business through subsidiaries. In Bangladesh, commercial banks

started their leasing operation effectively in 1995 (Banarjee and Mamun, 2003). At present,

almost all major private commercial banks are involved in non-bank financial operations.

Operation by banks in what have been traditional non-banking areas is often questioned by

NBFIs although both can act as complementary to each other rather than being competitors.

Bangladesh Lease and Finance Companies Association (BLFCA) alleged that commercial banks

of the country are engaged in non-bank finance activities within the existing banking rules,

which is posing difficulties for non-bank financial institutions.4 This is because by having access

to cheaper rate funds, banks have a comparative advantage over NBFIs that does not ensure

proper competition for both. Again, it is argued that if banks continue in the leasing business

then the default culture of the banking system may also infect the leasing industry.

26

17. Banks’ Entry in Non-Bank Financial Activity

SOURCES OF FUNDS

NBFIs collect funds from a wide range of sources including financial instruments, loans from

banks, financial institutions, insurance companies and international agencies as well as deposits

from institutions and the public. Line of credit from banks constitutes the major portion of total

funds for NBFIs. Deposit from public is another important source of fund for NBFIs, which has

been increasing over the years. NBFIs are allowed to take deposits directly from the public as

well as institutions. According to the central bank regulation, NBFIs has the restriction to collect

public deposits for less than one year, which creates uneven competition with banks as banks are

also exploring the business opportunities created by NBFIs with their lower cost of fund.

Although recent reduction of the minimum tenure of the term deposit from one year to six

months for institutional investor has had a positive impact on their deposit mobilization capacity.

NBFIs can develop attractive term deposit products of different maturities to have access to

public deposits as these are one significant source of their funds.

Although share capital is another prospective source of fund for NBFIs, many companies have

not utilized this opportunity fully. As all NBFIs are incorporated as public limited companies, it

could be a better alternative for them to raise fund through initial public offerings in order to

finance the expanding horizon of activities. Figure 7 shows the composition of the sources of

fund for NBFIs. It is evident that loan from bank and deposit base are the key sources for NBFIs’

fund and account for nearly 75 percent of the total. It can also be seen that the dominance of

bank loan in the total fund is decreasing while the importance deposit base is gaining

momentum.

COST OF FUND

The structure of cost of fund for NBFIs does not follow any unique trend. Banerjee and Mamun

(2003) showed that weighted average cost of fund for the leasing companies is always positioned

much higher than that of banks. According to their study, cost of funds for leasing companies

27

18. Challenging Issues for NBFIs

varied between 8.4 to 15.3 percent while that of banks was between 8.5 to 9.5 percent.

Choudhury (2001) mentioned that about 15 percent of the deposit of the banking sector was

reported to be demand deposits, which are interest free while 35 percent constituted low cost

saving deposits having an average of 4 to 5 percent interest rate and the rest were fixed deposits

bearing an average of 9 percent interest rate. Thus the weighted average cost of fund for banks

would be at best 7 to 8 percent, which is almost half of that of NBFIs.

ASSET-LIABILITY MISMATCH

Asset-liability mismatch is another cause of concern for NBFIs. Demand for funds to meet the

increasing lending requirements has increased many times. But the availability of funds has

become inadequate as NBFIs are mostly dependent on loan from commercial banks.

International Finance Corporation (1996) observed that leasing companies are in a great dilemma

while managing the mismatch between their asset and liability. According to IFC, the average

weighted life of the company’s business portfolio should be less than the average weighted life

of its deposits and borrowing in its operating guidelines for a leasing company. Only one

company in Bangladesh was successful in maintaining the above guideline (Banerjee and

Mamun (2003).

INVESTMENT IN HIGH RISK PORTFOLIO

It is already mentioned that cost of funds for NBFIs are higher than that of banks. In order to

sustain the high cost of borrowing, NBFIs may be inclined to invest in the high return segments,

which can expose them to commensurately higher risks. Moreover, fierce competition among

competitors may also force many NBFIs to reduce the margin at the expense of quality of the

asset portfolio. This strategy may eventually create the possibility of an increase in the non-

performing accounts. Unless adequate risk management capabilities are developed, the growth

prospects of NBFIs would not only be hindered but it might also be misapprehended (Sarker,

2004).

PRODUCT DIVERSIFICATION

NBFIs emerged primarily to fill in the gaps in the supply of financial services which were not

generally provided by the banking sector, and also to complement the banking sector in meeting

28

the financing requirements of the evolving economy. NBFIs are permitted to undertake a wide

array of activities and should therefore not confine themselves to a limited number of products

only. Leasing, no doubt, presents a good alternative form of term financing. Even in leasing,

investments were not always made in the real sector and non-conventional manufacturing sector.

Almost all the leasing companies concentrated on equipment leases to BMRE (Balancing,

Modernization, Replacement and Expansion) units only. New industrial units were hardly

brought under the purview of leasing facilities. This implies that the new customer base has not

been created and the growth of industrial entrepreneurship could not be facilitated through NBFI

financing packages. Diversifying the product range is a strategic challenge for NBFIs in order to

become competitive in the rapidly growing market.

COMPETITION WITH BANKS

With the advent of new NBFIs, the market share is being spread over the competing firms and

the demand facing each firm is becoming more elastic. Active participation of commercial banks

in the non-bank financing activities has further increased the level of competition in the industry.

Leasing was considered as a non-bank financing activity until recently. But a large number of

banks has also shown their interest in the leasing business and has already penetrated the market.

For banks, public deposit is one major source of funds which they can collect with relatively

lower cost. Thus the business environment for NBFIs has become more challenging as they have

to face uneven competition with banks in terms of collecting funds.

LACK OF HUMAN RESOURCE

Skilled and trained human resource is considered as an important component for the

development of any institution. Due to the recent growth of NBFIs, availability of experienced

manpower is a challenge for this industry. The supply shortage of efficient resource personnel

has been leading to a significant increase in the compensation package, which is also a cause of

concern for NBFIs. The industry experts believe that although there exist enormous growth

opportunity the market is still quite small and scope of work for skilled personnel is very limited

compared to that of banks. This makes the competent personnel to switch from NBFIs to other

institutions after a certain period implying low retention rate of skilled human resource.

29

WEAK LEGAL SYSTEM

Although the default culture has not yet infected NBFIs to any major extent, they face difficulties

in recovering the leased assets in case of a default. Moreover delays in court procedures create

another cause of concern. The situation cannot be improved only by making the legal system

stronger through enactment of new laws rather ensuring proper implementation existing ones is

more of concern.

LACK OF AN ESTABLISHED SECONDARY MARKET

Even in cases when the defaulted asset is recovered, the disposal of the same becomes difficult

because of lack of an established secondary market. For the promotion of a secondary market,

NBFIs may consider initiating the concept of operating lease instead of the prevale nt mode of

finance lease in case of these recovered assets to create a demand for second hand or used

machinery and equipment.

EXPLORING ALTERNATIVE SOURCES OF FUNDS

The finance and leasing companies across the world are using different sources for collecting

funds.

NBFIs in Bangladesh may also explore the possibilities of gaining access to new sources of

funds like issuance of commercial paper and discounting or sale of lease receivables. However,

in releasing such new products, some regulatory changes have to be made. Another innovative

and promising source of funds may be the securitisation of assets.6 In this connection, IPDC

launched first asset backed securities in 2004 as an alternative source of funding. This new

instrument emerged as an important tool and added a new dimension in the financial market. The

core attraction of this scheme was the tax benefit made available to investors at the rate of 10

30

19. Suggested Alternatives

percent at the time of credit of such interest or at the time of payment thereof, whichever is

earlier, and this deduction was deemed to be final discharge of tax liability (Chowdhury, 2005).

But changes in taxation policy in 2005 by the government have made the future of this

instrument less attractive for the concerned financial institutions.

COMPETITION AND PRODUCT DIVERSIFICATION

NBFIs in Bangladesh are operating in a highly competitive environment. The competition for

NBFIs is even more challenging as they have to compete with banks. Given the changes in the

business environment, the need for product diversification is very important. At present, lease

financing constitutes 55 percent of the total long term assets of NBFIs. The remaining part

concentrates mainly on term financing and housing finance. Some of NBFIs are primarily

engaged in leasing, some are also diversifying into other lines of business like merchant banking,

equity financing etc. Currently, 22 NBFIs (out of 29) specialize in lease financing. NBFIs are

permitted to undertake a wide array of activities and therefore should not confine themselves to

one or two types of product only. Leasing, no doubt, presents a good alternative form of term

financing but NBFIs should also venture into diversified use of their funds such as merchant

banking, venture capital financing, factoring, etc. for a healthy growth of the capital market.

ENHANCING CAPITAL MARKET ACTIVITIES

NBFIs around the world carry out a significant role in the development of the capital market.

Strong institutional support is necessary for a vibrant capital market which is the core of

economic development in any market based economic system. NBFIs through their merchant

banking wing can act in this regard.

ISSUES OF TAXATION

The financing mode of lending and leasing are totally different from one another. The concept

and procedure particularly the accounting and taxation system are also quite different. So it is

advisable not to mix up the two different operations, otherwise it might distort the basic financial

norms. As the tax treatment is totally different in leasing business, mixing up of lending and

leasing in the same business portfolio might create the possibility of tax evasion (Sarker, 2004).

31

MARKET SEGMENTATION

It has been discussed earlier that though banks and NBFIs compete with each other they can also

perform complementary functions. As suggested by Jamal (2004) and Sarker (2004), to function

as complementary institutions both banks and NBFIs should follow some ethical and technical

norms.

Banks wishing to enter in the leasing business, which is essentially a core operation of NBFIs,

should do so through opening subsidiaries so that a level playing field for NBFIs can be

maintained. This is needed as banks have access to lower cost funds compared to NBFIs, which

puts the former in an advantageous position. Alternatively, banks can go for joint financing

under syndication arrangements with leasing companies on any project proposal. Again, banks

can concentrate on working capital finance and foreign exchange operations, which matches

more with their asset-liability management. Long term investment like financing capital

machineries can be done by NBFIs and in the event when banks want to engage in such activities

they can place their funds with an NBFI to extend lease facility for those machineries. Jamal

(2004) mentioned that this is important for two reasons: “first, in case of lease facility, the

machineries will remain under the ownership of leasing companies, who will have absolute

authority and control on their assets. Second, machineries will be imported in the name of a

leasing company and letter of credit will be opened against its name. So, over invoicing or under

invoicing may be averted and thereby more transparency will be ensured and tax evasion may be

plugged”.

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

32

20. Conclusion

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. Another important role which

NBFI’s play in an economy is to act as a buffer, especially in the moments of economic distress.

An efficient NBFI sector also acts as a systemic risk mitigator and contributes to the overall goal

of financial stability in the economy.

NBFIs of Bangladesh have already passed more than two and a half decades of operation.

Despite several constraints, the industry has performed notably well and their role in the

economy should be duly recognized. It is important to view NBFIs as a catalyst for economic

growth and to provide necessary support for their development. A long term approach by all

concerned for the development of NBFIs is necessary. Given appropriate support, NBFIs will be

able to play a more significant role in the economic development of the country.

1. Asian Leasing Association (1998), “Asian Leasing Convention”, Dhaka, 1998

2. Bakker, M. R and Gross, A (2004), “Development of Non-bank Financial Institutions and

Capital

3. Markets in European Union Accession Countries”, World Bank Working Paper No.28

4. Banerjee, P. K. and Mamun, A.A (2003), “Lease Financing in Bangladesh”, BIBM

Research Paper.

5. Bangladesh Bank, Annual Report (Various Issues)

6. Bangladesh Bank, Economic Trends (Various Issues)

7. Bangladesh Bank Quarterly (Various Issues)

33

21. References

8. Bangladesh Bank (2006), “Financial Sector Review”, Vol.1, No.1, May, Policy Analysis

Unit,

9. Research Department.

10. Bangladesh Leasing and Finance Companies Association (BLFCA) Year Book (Various

Issues)

11. Barai, M. K., Saha, S., and Mamun, A. A (1999), “Progress and Prospects of Non-Bank

Financial

12. Institutions in Bangladesh”, Bank Parikrama, Vol. XXIV, No. 1

13. Chen Y.C. (2001), “Lease Financing in Taiwan”, In Lisa Paul ed.: World Leasing

Yearbook 2001,

14. UK: Adrian Hornbrook.

15. Choudhury A. Q. (2001), “Leasing in Bangladesh – Problems and Prospects”, The Daily

Star, April 4, 2001.

16. Choudhury A. Q. (2005), “Spotlight on the NBFIs of Bangladesh”, published in BLFCA

Year Book

17. 2005.

18. Goldsmith, R.W. (1969), Financial Structure and Development, Yale University Press,

London.

19. Jamal, S.H. (2004), “Banking and Leasing Complementary to Each Other”, published in

BLFCA Year Book 2004.

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

21. Sannamat, M. A. H. (2004), “Merchant Banks of Bangladesh: Prospects and Problems”,

published in

22. BLFCA Year Book 2004.

23. Sarker, M. (2004), “Managing a Non-Banking Financial Institutions – Some Issues of

Concern”,

24. published in BLFCA Year Book 2004.

25. Khan, A.A. (2004), “Leasing in Bangladesh”, published in BLFCA Year Book 2004.

26. Khan, A.A. (2005), “Product Options for Financial Institutions in Bangladesh”, published

in BLFCA

27. Year Book 2005.

34

28. Bangladesh Bank publication (January 2009), Chapter 4 :The Capital Market and Non-

Bank Financial Sector

29. Financial Sector Review (February, 2008), Volume III No. 1, Policy Analysis Unit,

30. Bangladesh Bank

31. Banglapedia- National Encyclopedia of Bangladesh

32. Daily Newspapers

Name of Non-Bank Financial Institution Year of

Commencement

1 Industrial Promotion and Development Company of Bangladesh Ltd (IPDC)

2 Saudi-Bangladesh Industrial and Agricultural Investment Company Ltd (SABINCO)

3 Industrial Development leasing Company of Bangladesh Ltd (IDLC)

4 The UAE Bangladesh Investment Company Ltd

5 United Leasing Company Ltd (ULCL)

6 Phoenix Leasing Company Ltd

7 Uttara Finance and Investment Ltd

8 International Leasing and Financial Services Ltd (ILFSL)

9 GSP Finance Company (Bangladesh) Ltd.

10 Prime Finance and Investment Ltd.

11 Oman Bangladesh Leasing and Investment Company Ltd

35

22. Annexure: The listing of NBFIs

12 Bay Leasing and Investment Ltd

13 Peoples Leasing and Financial Services Ltd.

14 First Lease International Ltd

15 Delta BRAC Housing Finance Corporation Ltd (DBH)

16 LankaBangla Finance Ltd.

17 Infrastructure Development Company Ltd (IDCOL)

18 Bangladesh Industrial Finance Company Ltd (BIFC)

19 Union Capital Ltd (UCL)

20 National Housing Finance and Investments Ltd

21 Midas Financing Ltd (MFL)

22 Bangladesh Finance and Industrial Company Ltd (BFIC)

23 Industrial and Infrastructure Development Finance Company Ltd (IIDFCL)

24 Islamic Finance and Investment Ltd (IFIL)

25 Fidelity Assets and Securities Company Ltd

26 Fareast Finance and Investment Ltd

27 Premier Leasing International Ltd

28 Self Employment Finance Ltd

29 Ahsania-Malaysia Hajj Investment and Finance Company Limited

36