Abstract
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
TABLE OF CONTENTS Sl
no.
Topics
Page no
1
Introduction
4
2
Industry definition
4
3
Services
5
4
Emergence of NBFIs in Bang ladesh
6
5
Classification
6
6
Ownership pattern
7
7
Market capitalization
10
8
The business cyc le and industry sectors
11
9
Some
15
provided
economic variab les and effect of their changes in
different industries
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 Financia l activity
26
18
Challenge issues for NBFI
27
2
19
Suggested
20
Conclusion
32
21
References
33
22
Annexure : listing of NBFI
35
alternatives
30
3
1. Introduction
on-Bank Financial Institutions (NBFIs) play a significant r ole in meeting the diver se financial needs of various sector s of an economy and thus contribute to the economic develo pment of the countr y as well as to the dee pening of the countr y¶s financial system. According to Goldsmith (1969), financial develo pment in a countr y star ts with the develo pment of bank ing institutions. As the develo pment pr ocess pr oceeds, NBFIs become pr ominent alongside the bank ing sector. Both can play significant r oles in inf luencing and mo bilizing savings f or investment. Their involvement in the pr ocess gener ally makes them competitor s as they tr y to cater to the same needs. However , they ar e also complementar y to each other as each can develo p its own niche, and thus may ventur e into an ar ea wher e the other may not, which ultimately str engthens the financial mo bility of both.
2. Industry Definition
NON-BANK FINANCIAL COMPANY
Non- bank financial companies (NBFCs) ar e financial institutions that pr ovide bank ing services without meeting the legal definition of a bank, i.e. one that does not hold a bank ing license. These institutions ar e not allowed to take de posits fr o m the pu blic. Nonetheless, all o per ations of these institutions ar e still exer cised under bank r egulation. However this de pends on the jurisdiction, as in some jurisdictions, such as New Zealand, any company can do the business of bank ing, and ther e ar e no bank ing licenses issued.
4
NON-BANK FINANCIAL INSTITUTION
A non- bank financial institution (NBFI) is a financial institution that does not have a f ull bank ing license or is not su pervised by a national or inter national bank ing r egulator y agency. NBFIs f acilitate bank-r elated financial services, such as investment, risk pooling, contr actual savings, and mar ket br okering.[1] Examples of these include insur ance firms, pawn sho ps, cashier's check issuer s, check cashing locations, curr ency exchanges, and micr oloan organizations.
3. Services provided
NBFCs off er all sor ts of bank ing services, such as loans and cr edit f acilities, private education f unding, r etir ement planning, tr ading in money mar kets, underwriting stocks and shar es, TFCs and other o bligations. These institutions also pr ovide wealth management such as managing por tf olios of stocks and shar es, discounting services e.g. discounting of instr uments and advice on merger and acquisition activities. The number of non- bank ing financial companies has ex panded gr eatly in the last sever al year s as ventur e ca pital companies, r etail and industrial companies have enter ed the lending business. Non- bank institutions also fr equently su ppor t investments in pr o per ty and pr e par e f easibility, mar ket or industr y studies f or companies. However they ar e ty pically not allowed to take de posits fr o m the gener al pu blic and have to find other means of f unding their o per ations such as issuing de bt instr uments
5
4. Emergence of Non-Bank Financial Institutions in Bangladesh
Initially, NBFIs wer e incorpor ated in Bangladesh under the Companies Act, 1913 and wer e r egulated by the pr ovision r elating to Non-Bank ing Institutions as contained in Cha pter V of the Bangladesh Bank Order , 1972. But this r egulator y fr amewor k was not adequate and NBFIs had the sco pe of carr ying out their business in the line of bank ing. Later , Bangladesh Bank pr omulgated an order titled µNon Bank ing Financial Institutions Order , 1989¶ to pr omote better r egulation and also to r emove the ambiguity r elating to the permissible ar eas of o per ation of NBFIs. But the order did not cover the whole r ange of NBFI activities. It also did not mention anything a bout the statutor y liquidity r equir ement to be maintained with the centr al bank . To r emove the r egulator y deficiency and also to define a wide r ange of activities to be cover ed by NBFIs, a new act titled µFinancial Institution Act, 1993¶ was enacted in 1993 (Bar ai et al. 1999). Industrial Pr omotion and Develo pment Company (IPDC) was the fir st private sector NBFI in Bangladesh, which star ted its o per ation in 1981. Since then the number has been incr easing and in December 2006 it r eached 29.1 Of these, one is gover nment owned, 15 ar e local (private) and the other 13 ar e esta blished under joint ventur e with f or eign par ticipation.
5. Classification
De pending u pon their natur e of activities, non- bank ing finance companies can be classified into the f ollowing categories: 1. Develo pment finance institutions 2. Leasing companies 3. Investment companies 4. Mudar a ba companies
6
5. House finance companies 6. Ventur e ca pital companies 7. Discount & guar antee houses
6. Ownership Pattern The ownership pattern of NBFIs, nature of activities and share percentages are in be low:
Owner ship
Name of
patter n
NBFIs
Govt.
1
% of local
Shar e
Govt.
f or eign
IDCOL
-
Natur e
of
Activities
100
(100%)
Leasing, Pr o ject fiancing
LocalPrivate
2
PLC
100
-
-
Leasing
3
UCL
100
-
-
Leasing, Investment Bank ing
4
PFIL
100
-
-
Leasing, Investment & Mer chant Bank ing. Housing
5
BLIL
100
-
-
Leasing, Mer chant
7
bank ing 6
PLFSL
100
-
-
Leasing
7
NHL
100
-
-
Housing
8
MIDAS
100
-
-
Loan
9
FLIL
100
-
-
Loan
10
BFIL
100
-
-
Investment Bank ing
11
IIDFCL
100
-
-
NA*
12
Islamic
100
-
-
NA*
Finance Joint Ventur e
13
ULCL
28
60
12
Leasing
14
IDLC
46.8
45
8.11
Leasing, Loan, Mer chant Bank ing
15
SABIN CO
50
50
-
Loan, Investment & Mer chant Bank ing
16
UFIL
25
25
50
Leasing, Mer chant Bank ing
17
UAEBIC
40
60
-
Loan, Investment
8
18
ILFS
NA
Leasing Loan
19
GSP-FCL
14
76
-
Leasing, Mer chant Bank ing
20
BBFIL
70
30
-
Leasing, Loan
21
DBH
70
30
22
VANIK
70
30
Housing -
Leasing, Investment, Mer chant Bank ing and Housing Finance
23
BIFL
NA
24
IPDC
30
Leasing
70
-
Leasing, Loan, Investment.
25
FA
NA
NA*
Data Sour ce ± BB, NBFIs *NA- Not availa ble
9
7. Market Capitalization and Listed Securities
The total mar ket ca pitalization at DSE r eached Tk . 1,043.8 billion in December 2008 with 412 listed securities consisting of 276 companies, 16 mutual f unds, eight de bentur es, 111 Gover nment bonds, and one corpor ate bond. The ca pital mar ket r eached new heights in terms of mar ket ca pitalization. At the end of 2008, mar ket ca pitalization at DSE was 19.3 per cent of the countr y's GDP compar ed with 15.7 per cent in December 2007. During 2008, total issued ca pital r ose by Tk . 33.2 billion of which Tk . 16.5 billion was thr ough bonus and right issues and Tk . 16.7 billion was by new issues. During the year , 15 companies wer e listed in DSE of which five wer e listed thr ough the dir ect listing r oute. In terms of sect or al composition, the financial sector (including banks, investment and insur ance) continues to hold the ma jority shar e in total mar ket ca pital ca pitalization at DSE: 55.6 per cent as compar ed with 24.6 per cent f or manuf acturing and 19.5 per cent f or service and miscellaneous sector in December 2008. The shar e of the financial sector in total mar ket ca pitalization was 64.2 per cent in December 2007.
10
Figure: Sector-wise Composition of Market Capita lization in DSE
Note: Figur es in par entheses show the shar e of the su b-sector s in total mar ket ca pitalization of listed companies. Sour ce: The Monthly Review, Dhaka Stock Exchange, December 2008.
8. THE BUSINESS CYCLE AND INDUSTRY SECTOR S
Industr y perf ormance can be largely aff ected by economic tr ends. This economy can be monitor ed by identif ying and monitoring the key economic varia bles, diff er ent assumptions and theories. Ther e ar e some other measur es like ± gathering u p new inf ormation a bout economic outlook and conducting various analysis of r elevant industr y on the basis of accumulated inf ormation.
11
Economic tr end basically f alls in f ollowing two basic categories ±
Cyclical change
Str uctur al change
Cyclical change: this sor t of change arises fr o m the f luctuation (u ps and downs) of the business cycle.
Str uctur al change: this sor t of change occur s when an economy undergoes thr ough ma jor str uctur al r ef orm and f unctional change. Tr ansition of United States fr om manuf acturing to service economy or tr ansition fr o m social to mar ket economy ar e he po pular examples of str uctur al changes.
INDUSTRY PERFORMANCE IN BUSINESS CYCLE
It is believed by various ex per ts that, industr y perf ormance is ver y much r elated to the diff er ent stages of business cycle. And these stages make the analysis of industr y challenging. As the cycle r otates or f luctuates it also cr eates variation in analysis of perf ormance. So, it is impor tant to r ealize the position of that industr y fir st in the business cycle bef or e f or ecasting or analyzing. If anyone takes into account the histor y only then he will miss the changing tr end of that industr y and definitely the f or ecasting will contain su bstantial misstatements.
Her , another thing should also be mentioned that, sometimes , switching fr o m one industr y gr ou p to another also takes place in a business cycle which is known as R otation Str ategy. In this case also, it is necessar y to determine the position of industr y in the business cycle. If it ensur es that, the next stage of business cycle is going to benefit the industr y gr ou p, only then the investor s should go f or that industr y gr ou p and need to identif y and monitor the key varia bles r elated to the economic tr ends.
12
The figur e pr esents a gr a phic of which sever al industries perf orm well in sever al stage of business cycle. TOWARD THE END OF A RECESSION
No
Impact
Reason
1
Financial stock value soar s
Investor s anticipates that - banks ear nings will rise - both economy and loan r ecover
2
3
Br oker age house become attr active
Sales and ear nings of br oker age houses ar e
investments
ex pected to rise because
consumer sta ples out perf orm other s
-
Investor s tr ade securities
-
Businesses sell de bt and equity.
Actually consumer sta ples ar e irr elevant with r ecession or boom. If the over all s pending declines at a higher r ate, peo ple will still s pend f or f ood, pharmaceuticals, bever ages.
13
WHEN THE RECESSION ENDS
No
Impact
1
Incr ease in loan demand
2
Incr ease in house constr uction
3
Incr ease in security off ering
AT THE BEGINNING OF RECOVERY LEVEL
No
impact
1
Consumer dur a ble industr y (car , A r eviving economy incr eases
2
Reason
PC, r efriger ator etc)ex periences
-
boom
- per sonal income
Ca pital
goods
Consumer confidence
industries When the economy r ecover s, peo ple think a bout
f lourishes
-
moder nizing
-
r enovating
- pur chasing ca pital goods 3
Cyclical
industries
become High degr ee of o per ating lever age makes this industr y
attr active investments
lucr ative.
AT THE PEAK OF BUSINESS CYCLE
No
Impact
reason
1
R ate of inf lation incr eases
Demand surpasses the su pply
2
Basic material industries becomes Inf lation has little inf luence on the cost o extr acting investor s f avorite
those pr oducts and they can -
incr ease price
-
ensur e higher pr ofit margin.
If a weak domestic economy cause weak curr ency, industries with large ex por t components to gr owing economies may benefit because their goods become mor e cost competitive in the over seas mar ket. 14
9. SOME ECONOMIC VARIABLES AND EFFECT OF THEIR CHANGES IN DIFFERENT INDUSTRIES INFLATION
NO INDUSTRY 1
Stock mar ket
IMPACT
REASON
Negative
Inf lation causes -
higher mar ket inter est r ate
-
incr eases uncer tainty a bout f utur e price and cost
-
harm to ims those can not pass thr ough their cost incr ease
2
Natur al r esour ces
Positive
If pr oduction cost do not ise with inf lation they can likely to sell their out put at a higher price
3
Industries having high
Benefit
o per ating
-
their costs ar e fixed with nominal terms
-
r evenue incr ease with inf lation
lever age 4
Industries high
with benefit
Their de bts ar e r e paid in chea per dollar s
financial
lever age
INTEREST RATE
No. INDUSTRIES 1
Financial
IMPACT
REASON
negative
It is difficult o pass on the higher r ates
institutions 2
Housing
to customer s . and
negative
constr uction
Peo ple
get
r eluctant
to
s pend
additional amount of money in this sector
3
Do-it-your self er
positive 15
su pplier r etir ees
4
positive
As r etir ees¶ income de pends on the inter est, it incr eases their income
INTERNAIONAL EONOMICS
The f luctuation of dollar or eur o or other curr ency may cause significant variation in r ecognition of r evenue in the inter national ex por t/impor t business CONSUMER SENTIMENT
Optimistic consumer s ar e mor e wiling to s pend money f or ex pensive goods like- house, car , f ur nitur e etc. ther ef or e perf ormance of consumer cyclical industries will be aff ected by changes of -
consumer sentiment
-
Consumer s¶ willingness and a bility to borr ow and s pend money.
STRUCTURAL ECONOMIC CHANGES AND ALTERNAIVE INDUSTRIES
Apar t fr om the f actor s described below, ther e ar e some other impor tant f actor s which have significant impact on the cash low and risk pr os pect of diff er ent industries, likeDEMOGRAPHICS
Demogr a phy has a large impact on a countr y¶s consumption in sever al issues like -
Adver t izing
-
House constr uction
-
Health car e
-
Social security and so on. 16
AND POPULATIONS OF DIFFERENT AGE HAVE DIFFERENT USAGE TO THE ECONOMY
No
Population type
1
Young
peo ple
Impact
-
Adequate stor age of entr y level wor ker s
-
Decr easing la bor cost
-
R esour ce per son availa ble f or r e placing the r etiring per son
2
Senior citizen
-
Save mor e
-
Invest their savings. Ther ef or e good or financial industries
LIFESTYLES
Consumer behavior is highly aff ected by tr ends and f ads. And sales in sever al industries have aff ected fr o m exer cise of consumer wide variety of choices. No
Consumer choice
Affected industries
1
Junk f ood
R estaur ants, f ast f ood sho ps
2
Private r esidence
Housing and r eal state
3
Private tr ans por t
Automo bile
4
Dual car eer f amilies
Day car e center
TECHNOLOGY
Tr ends in technology can aff ect numer ous industr y f actor s. For example, demand has f allen f or carbur etor s and shif ted electr onic f uel in jection due to advancement of technology. Inf ormation su per highway is becoming a r eality and encour aging linkages between telecommunication and ca ble television system. Changes in technology have s purr ed ca pital s pending in technological equipments as a mean to gain competitive advantage. R etailing industr y has become a user of new technology. It hel ps r etailing business to be mor e decentr alized and geogr a phically diver sified. Ma jor r etailer s use bar -code scanning to s peed u p 17
the check out pr ocess. EDI allows the r etailer s to connect with the su pplier s electr onically and to order new inventor y and pay accounts paya ble EFT allows moving f unds quickly and easily thr ough local banks and headquar ter s
POLITICS AND REGULATIONS
Today¶s social value may be tomorr ow¶s law ± as political change r ef lects social values. Some impacts of political change on business ar e as f ollows -
Heavy r egulation of an industr y can r esult in incr easing firm¶s cost but r estricts entr y to the industr y.
-
Changing r egulation of industr y brings par ticipants of financial service industries together
-
Political r egulations and law aff ect inter national commer ce ± tr ade laws, tariff s, embargoes and other tr ade barrier s.
10.
GLOBAL INDUSTRY ANALYSIS
In the er a of glo balization, so many firms of diff er ent industries ar e involved in the f or eign mar ket as well as f or eign firms ar e also doing business In our countr y. That is necessar y to consider the eff ects of f or eign firms on industr y r etur ns.we must extend analysis to include glo bal f actor. Following ma jor f actor s ar e needed to be analyzed in this r es pect
The macr o envir onment of the par ent countr y and the demand in the su bsidiar y countr y
18
Accounting diff er ences by diff er ent countries.
Eff ect of curr ency exchange r ate tr ends
Socio ±political f actor s, barrier s etc.
In summar y, it is necessar y to consider glo bal f actor s while analyzing industr y.
11. MAJOR PLAYER S IN NBFI SECTOR In NBFI sector of Bangladesh, ther e exists 29 NBFIs and their ma jor player s ar e as f ollows
Bangladesh Bank
Securities & Exchange Commission
Inter bank call money mar ket
Existing a pplicanle r ules, r egulation, laws and acts.
12. NBFI INDUSTRY TAX STRUCTURE The standard r ate of corpor ate tax in Bangladesh is 27.5% in 2010 - 2011 tax year. This is the standard corpor ate tax r ate a pplica ble to pu blicly tr aded companies in Bangladesh, a list including
tax
r ates
f or
No. Industr y sector 1
Pu blicly Tr aded Company
2
Non- pu blicly Tr aded Company
other
corpor ations
ar e
as
f ollows:
Tax r ate 27.5% 37.5%
19
3
Bank, Insurance & Financia l Company
42.5%
4
Mo bile Phone Oper ator Company
45%
5
Pu blicly Tr aded Mo bile Oper ator Company
35%
13. VALUATION OF STOCK IN NBFI
Following system is a pplica ble in valuation of stocks in NBFICOMPARABLE INDUSTRY MULTIPLE
Valuation using multiples is a method f or determining the curr ent value of a company by
examining and comparing the financial r atios of r elevant peer gr ou ps, also of ten described as comparab le company analysis. The most widely used multiple is the price-ear ning r atio(P/E r atio or PER ) of stocks in a similar industr y. Using the aver age of multiple PER s impr oves r elia bility but it can still be necessar y to corr ect the PER f or curr ent mar ket conditions. P/E multiples ar e po pular in par t due to their wide availa bility. The value of a business should, however , be r ef lected in multiples based on enterprise value of a company. These multiples r eveal the r ating of a business inde pendently of its ca pital str uctur e, and ar e the most commonly used in tr ansactions on private companies. Formula:
Condition: Peer company is pr o fita ble. 20
Rf = discount r ate during the last f or ecast year tf = last year of the f or ecast period. C = corr ection f actor P = curr ent stock Price NPP = net pr ofit peer company S = number of shar es NPO = net pr ofit of target company af ter f or ecasted period.
And fr o m r ecent study, it is f ound 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
14. Key success factors:
1. Globalization : Today¶s wor ld is like a glo bal village. Competition is mor e critical in a glo bal
mar ket. Glo balization is the most impor tant key success f actor s of NBFIs. NBFIs have to co pe with glo balized competition to achieve the o ptimum success. Glo balization incr eases the sco pe of business of this sector in a large scale.
21
2. Cost Efficiency : Cost efficiency means to r educe the cost and the same time to incr ease the
quality of the service. It means cost has to be r educed but the quality should not deterior ate when r educing the cost. 3. Quality: Long term success of NBFIs can only be ensur ed by pr oviding the r equir ed quality of
goods & services to the consumer. Without enhancing quality of service no NBFIs can survive in the long r un. 4. Increase Market Share: No company¶s gr owth & develo pment is not possible until & unless
it incr eases its mar ket shar e. Mar ket shar e means the cover age of mar kets segment of the r elevant industr y by any par t icular company. 5. Advertisement: Adver tisement is like the light-house of any company. It is adver tisement that
intr oduces a company to all over the wor ld and incr eases the consciousness of potential consumer s a bout the service or pr oducts of a company. By using the adver tisement pr o per ly any company can ensur e it¶s smooth success. 6. Marketing Mix: Mar keting mix as a compr ehensive business policy is a r ecent hallmar k in
achieving business success. Mar keting mix means the perf ect combination of pr esent and potential mar keting policy to incr ease the company¶s identity thr oughout the wor ld with a view to incr ease r evenue.
15. Driving Forces
NBFIs ar e s pecialists of the intermediation pr ocess and their origins can be tr aced to the develo pment of s pecialized financial institutions. Some survived centuries of changing economic and financial develo pments. Other s a ppear ed in r es ponse to s pecial o ppor tunities or needs and have disa ppear ed just as quickly. Their survival and existence de pend u pon their a bility to (a) off er contr acts that serve the needs of s pecialized customer s, (b) maintain a s pr ead between the
22
r ate they pay f or f unds and the r ate they r eceive that will su ppor t their costs, and (c) meet commitment to su pplier s of f unds. The non- bank financial sector has a wide diver sity of institutions. Des pite their impor tance as alter native sour ces of finance to the commer cial banks, their lia bilities may never theless be r egarded as 'near money'. The key driving f or ces of the NBFIs ar e as f ollows: 1. Product innovation: Innovation of new pr oduct & services leads any NBFIs to drive its
pr esent business o per ation. Co ping with new pr oduct or service is essential to survive in the mar ket. Obsolete pr oduct line cannot ensur e smooth success. 2. Product Differentiation : No NBFIs should wait f or innovating new services by other
institutions. They themselves should tr y to diff er entiate its pr esent service or pr oduct line to str engthen its mar ket position. This f or ce also leads the diver sification of the sector ¶s institutions. 3. Changes in long term growth : Potential symptoms of changes in long term gr owth leads
diver sification of institutions. It may be r equir ed by customer demand or r egulations or by competitor s. Even the size of potential gr owth drives the institutions. 4. Business Contracting: Contr acting with new & new businesses wor ks as a key f or ce to
diver se the sector. Business contr acting may be r equir ed to change the fr amewor k of the institutions. Diff er ent businesses have diff er ent ty pes & natur e of contr acts that wor ks as a driver of the institutions. 5. Marketing Innovation: Innovation of moder n mar keting conce pt also drives the institutions.
The NBFIs have to r ealize and implement the develo ped mar keting theor y to compete. New conce pts lead the diver sification of contempor ar y mar keting policy. 6. Economies of Scale: To o btain the economies of scale, many NBFIs change its contempor ar y
business cycle and pr ocesses. Because economies of scale is a key success f actor. And in some cases af ter attaining the economies of scale many NBFIs diver se its o per ation of business.
23
7. Regulations: Most of the time diff er ent r egulations imposed by contr olling authority drive the
o per ations of the NBFIs. As ther e is no o ption to esca pe fr o m the hand of r egulation, the NBFIs have to implement the changes r equir ed by the r ules and r egulations.
:
16. HIGHLIGHTS THE MAJOR EVENTS
LARGE PROFITS FROM CORE BUSINESSES
Non- bank financial institutions (NBFIs) have logged huge pr ofits fr om the Booming Stock mar ket fr om their cor e business. They r ecorded 25 per cent gr owth in o per ating pr ofits in 2010, statistics show. On aver age, 60 per cent of the pr ofits wer e gener ated thr ough the ca pital mar ket o per ations alone.
PAID UP CAPITAL DOUBLE
The Bangladesh Bank dir ected non- bank financial institutions (NBFIs) to dou ble their paid-u p ca pital to Tk 50 cr or e fr om the existing Tk 25 cr or e. Central bank sets December 2010 dead line 24
OPPORTUNITY OF TAKING FOREIGN LOANS
R ecently The Centr al Bank said , Non- bank financial institutions (NBFIs) can now take f or eign loans only f or f unding manuf acturing and infr astr uctur e (exce pt housing) sector s.
LIQUIDITY PRESSURE
NBFIs will come under fr esh liquidity pr essur e between April and June in fiscal year (FY) 201011 (FY11) when the gover nment will be borr owing, at least, an amount of Tk 63.25 billion fr o m them.
BB TO BRING NBFIS UNDER BASEL-II FROM 2012
The Basel-II accord fr o m Januar y 2012 aiming at consolidating ca pital base of the countr y's financial institutions. NBFIs would calculate minimum ca pital r equir ement under the Basel-II on test basis fr o m Januar y 1, 2011 using the dr af t guideline.
25
17. Banks¶ Entry in Non-Bank Financial Activity The activities of NBFIs witnessed an impr essive gr owth during the last five year s. As per Section 7 of the Bank ing Companies Act 1991, commer cial banks also star ted diff er ent activit ies off er ed by NBFIs, s pecially leasing. The entr y of banks in this sector is ex pected to br ace the gr owth momentum and will fill the ga p in acquiring the institutional finance and serve the needs of the industrial sector in the acquisition of ca pital assets. Commer cial banks wor ldwide ar e dir ectly or indir ectly involved in activities such as leasing, hir e pur chase, term lending, house financing and ca pital mar ket o per ation. In develo ped countries commer cial banks ar e also actively involved in diff er ent activities other than bank ing. In Tur key, banks ar e empower ed to arr ange lease finance by vir tue of s pecial laws r elating to this par ticular activity. Following the der egulation of the local bank ing system as well as diver sification of business, a number of banks in Taiwan esta blished their own inde pendent leasing companies (Chen 2001). In India, commer cial banks ar e permitted to tr ansact leasing business thr ough su bsidiaries. In Bangladesh, commer cial banks star ted their leasing o per ation eff ectively in 1995 (Banarjee and Mamun, 2003). At pr esent, almost all ma jor private commer cial banks ar e involved in non- bank financial o per ations. Oper ation by banks in what have been tr aditional non- bank ing ar eas is of ten questioned by NBFIs although both can act as complementar y to each other r ather than being competitor s. Bangladesh Lease and Finance Companies Association (BLFCA) alleged that commer cial banks of the countr y ar e engaged in non- bank finance activities within the existing bank ing r ules, which is posing difficulties f or non- bank financial institutions.4 This is because by having access to chea per r ate f unds, banks have a compar ative advantage over NBFIs that does not ensur e pr o per competition f or both. Again, it is argued that if banks continue in the leasing business then the def ault cultur e of the bank ing system may also inf ect the leasing industr y.
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18. Challenging Issues for NBFIs
SOURCES OF FUNDS
NBFIs collect f unds fr om a wide r ange of sour ces including financial instr uments, loans fr o m banks, financial institutions, insur ance companies and inter national agencies as well as de posits fr o m institutions and the pu blic. Line of cr edit fr om banks constitutes the ma jor por tion of total f unds f or NBFIs. De posit fr om pu blic is another impor tant sour ce of f und f or NBFIs, which has been incr easing over the year s. NBFIs ar e allowed to take de posits dir ectly fr om the pu blic as well as institutions. According to the centr al bank r egulation, NBFIs has the r estriction to collect pu blic de posits f or less than one year , which cr eates uneven competition with banks as banks ar e also ex ploring the business o ppor tunities cr eated by NBFIs with their lower cost of f und. Although r ecent r eduction of the minimum tenur e of the term de posit fr o m one year to six months f or institutional investor has had a positive impact on their de posit mo bilization ca pacity. NBFIs can develo p attr active term de posit pr oducts of diff er ent maturities to have access to pu blic de posits as these ar e one significant sour ce of their f unds. Although shar e ca pital is another pr os pective sour ce of f und f or NBFIs, many companies have not utilized this o ppor tunity f ully. As all NBFIs ar e incorpor ated as pu blic limited companies, it could be a better alter native f or them to r aise f und thr ough initial pu blic off erings in order to finance the ex panding horizon of activities. Figur e 7 shows the composition of the sour ces of f und f or NBFIs. It is evident that loan fr o m bank and de posit base ar e the key sour ces f or NBFIs¶ f und and account f or near ly 75 per cent of the total. It can also be seen that the dominance of bank loan in the total f und is decr easing while the impor tance de posit base is gaining momentum. COST OF FUND
The str uctur e of cost of f und f or NBFIs does not f ollow any unique tr end. Banerjee and Mamun (2003) showed that weighted aver age cost of f und f or the leasing companies is always positioned much higher than that of banks. According to their study, cost of f unds f or leasing companies 27
varied between 8.4 to 15.3 per cent while that of banks was between 8.5 to 9.5 per cent. Choudhur y (2001) mentioned that a bout 15 per cent of the de posit of the bank ing sector was r e por ted to be demand de posits, which ar e inter est fr ee while 35 per cent constituted low cost saving de posits having an aver age of 4 to 5 per cent inter est r ate and the r est wer e fixed de posits bearing an aver age of 9 per cent inter est r ate. Thus the weighted aver age cost of f und f or banks would be at best 7 to 8 per cent, which is almost half of that of NBFIs. ASSET-LIABILITY MISMATCH
Asset-lia bility mismatch is another cause of concer n f or NBFIs. Demand f or f unds to meet the incr easing lending r equir ements has incr eased many times. But the availa bility of f unds has become inadequate as NBFIs ar e mostly de pendent on loan fr o m commer cial banks. Inter national Finance Corpor ation (1996) o bserved that leasing companies ar e in a gr eat dilemma while managing the mismatch between their asset and lia bility. According to IFC, the aver age weighted lif e of the company¶s business por tf olio should be less than the aver age weighted lif e of its de posits and borr owing in its o per ating guidelines f or a leasing company. Only one company in Bangladesh was successf ul in maintaining the a bove guideline (Banerjee and Mamun (2003). INVESTMENT IN HIGH RISK PORTFOLIO
It is alr eady mentioned that cost of f unds f or NBFIs ar e higher than that of banks. In order to sustain the high cost of borr owing, NBFIs may be inclined to invest in the high r etur n segments, which can ex pose them to commensur ately higher risks. Mor eover , fier ce competition among competitor s may also f or ce many NBFIs to r educe the margin at the ex pense of quality of the asset por tf olio. This str ategy may eventually cr eate the possibility of an incr ease in the non perf orming accounts. Unless adequate risk management ca pa bilities ar e develo ped, the gr owth pr os pects of NBFIs would not only be hinder ed but it might also be misa ppr ehended (Sar ker , 2004). PRODUCT DIVERSIFICATION
NBFIs emerged primarily to fill in the ga ps in the su pply of financial services which wer e not gener ally pr ovided by the bank ing sector , and also to complement the bank ing sector in meeting 28
the financing r equir ements of the evolving economy. NBFIs ar e permitted to under take a wide arr ay of activities and should ther ef or e not confine themselves to a limited number of pr oducts only. Leasing, no dou bt, pr esents a good alter native f orm of term financing. Even in leasing, investments wer e not always made in the r eal sector and non-conventional manuf acturing sector. Almost all the leasing companies concentr ated on equipment leases to BMRE (Balancing, Moder nization, R e placement and Ex pansion) units only. New industrial units wer e hardly br ought under the purview of leasing f acilities. This implies that the new customer base has not been cr eated and the gr owth of industrial entr e pr eneur ship could not be f acilitated thr ough NBFI financing packages. Diver sif ying the pr oduct r ange is a str ategic challenge f or NBFIs in order to become competitive in the r a pidly gr owing mar ket. COMPETITION WITH BANKS
With the advent of new NBFIs, the mar ket shar e is being s pr ead over the competing firms and the demand f acing each firm is becoming mor e elastic. Active par ticipation of commer cial banks in the non- bank financing activities has f ur ther incr eased the level of competition in the industr y. Leasing was consider ed as a non- bank financing activity until r ecently. But a large number of banks has also shown their inter est in the leasing business and has alr eady penetr ated the mar ket. For banks, pu blic de posit is one ma jor sour ce of f unds which they can collect with r elatively lower cost. Thus the business envir onment f or NBFIs has become mor e challenging as they have to f ace uneven competition with banks in terms of collecting f unds. LACK OF HUMAN RESOURCE
Sk illed and tr ained human r esour ce is consider ed as an impor tant component f or the develo pment of any institution. Due to the r ecent gr owth of NBFIs, availa bility of ex perienced man power is a challenge f or this industr y. The su pply shor tage of efficient r esour ce per sonnel has been leading to a significant incr ease in the compensation package, which is also a cause of concer n f or NBFIs. The industr y ex per ts believe that although ther e exist enormous gr owth o ppor tunity the mar ket is still quite small and sco pe of wor k f or sk illed per sonnel is ver y limited compar ed to that of banks. This makes the competent per sonnel to switch fr o m NBFIs to other institutions af ter a cer tain period implying low r etention r ate of sk illed human r esour ce.
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WEAK LEGAL SYSTEM
Although the def ault cultur e has not yet inf ected NBFIs to any ma jor extent, they f ace difficulties in r ecovering the leased assets in case of a def ault. Mor eover delays in cour t pr ocedur es cr eate another cause of concer n. The situation cannot be impr oved only by mak ing the legal system str onger thr ough enactment of new laws r ather ensuring pr o per implementation existing ones is mor e of concer n. LACK OF AN ESTABLISHED SECONDARY MARKET
Even in cases when the def aulted asset is r ecover ed, the dis posal of the same becomes difficult because of lack of an esta blished secondar y mar ket. For the pr omotion of a secondar y mar ket, NBFIs may consider initiating the conce pt of o per ating lease instead of the pr evale nt mode of finance lease in case of these r ecover ed assets to cr eate a demand f or second hand or used machiner y and equipment.
19. Suggested Alternatives
EXPLORING ALTERNATIVE SOURCES OF FUNDS
The finance and leasing companies acr oss the wor ld ar e using diff er ent sour ces f or collecting f unds. NBFIs in Bangladesh may also ex plor e the possibilities of gaining access to new sour ces of f unds like issuance of commer cial pa per and discounting or sale of lease r eceiva bles. However , in r eleasing such new pr oducts, some r egulator y changes have to be made. Another innovative and pr omising sour ce of f unds may be the securitisation of assets.6 In this connection, IPDC launched fir st asset backed securities in 2004 as an alter native sour ce of f unding. This new instr ument emerged as an impor tant tool and added a new dimension in the financial mar ket. The cor e attr action of this scheme was the tax benefit made availa ble to investor s at the r ate of 10 30
per cent at the time of cr edit of such inter est or at the time of payment ther eof , whichever is ear lier , and this deduction was deemed to be final discharge of tax lia bility (Chowdhur y, 2005). But changes in taxation policy in 2005 by the gover nment have made the f utur e of this instr ument less attr active f or the concer ned financial institutions. COMPETITION AND PRODUCT DIVERSIFICATION
NBFIs in Bangladesh ar e o per ating in a highly competitive envir onment. The competition f or NBFIs is even mor e challenging as they have to compete with banks. Given the changes in the business envir onment, the need f or pr oduct diver sification is ver y impor tant. At pr esent, lease financing constitutes 55 per cent of the total long term assets of NBFIs. The r emaining par t concentr ates mainly on term financing and housing finance. Some of NBFIs ar e primarily engaged in leasing, some ar e also diver sif ying into other lines of business like mer chant bank ing, equity financing etc. Curr ently, 22 NBFIs (out of 29) s pecialize in lease financing. NBFIs ar e permitted to under take a wide arr ay of activities and ther ef or e should not confine themselves to one or two ty pes of pr oduct only. Leasing, no dou bt, pr esents a good alter native f orm of term financing but NBFIs should also ventur e into diver sified use of their f unds such as mer chant bank ing, ventur e ca pital financing, f actoring, etc. f or a healthy gr owth of the ca pital mar ket. ENHANCING CAPITAL MARKET ACTIVITIES
NBFIs ar ound the wor ld carr y out a significant r ole in the develo pment of the ca pital mar ket. Str ong institutional su ppor t is necessar y f or a vibr ant ca pital mar ket which is the cor e of economic develo pment in any mar ket based economic system. NBFIs thr ough their mer chant bank ing wing can act in this r egard. ISSUES OF TAXATION
The financing mode of lending and leasing ar e totally diff er ent fr o m one another. The conce pt and pr ocedur e par ticular ly the accounting and taxation system ar e also quite diff er ent. So it is advisa ble not to mix u p the two diff er ent o per ations, otherwise it might distor t the basic financial norms. As the tax tr eatment is totally diff er ent in leasing business, mixing u p of lending and leasing in the same business por tf olio might cr eate the possibility of tax evasion (Sar ker , 2004).
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MARKET SEGMENTATION
It has been discussed ear lier that though banks and NBFIs compete with each other they can also perf orm complementar y f unctions. As suggested by Jamal (2004) and Sar ker (2004), to f unction as complementar y institutions both banks and NBFIs should f ollow some ethical and technical norms. Banks wishing to enter in the leasing business, which is essentially a cor e o per ation of NBFIs, should do so thr ough o pening su bsidiaries so that a level playing field f or NBFIs can be maintained. This is needed as banks have access to lower cost f unds compar ed to NBFIs, which puts the f ormer in an advantageous position. Alter natively, banks can go f or joint financing under syndication arr angements with leasing companies on any pr o ject pr o posal. Again, banks can concentr ate on wor ki ng ca pital finance and f or eign exchange o per ations, which matches mor e with their asset-lia bility management. Long term investment like financing ca pital machineries can be done by NBFIs and in the event when banks want to engage in such activities they can place their f unds with an NBFI to extend lease f acility f or those machineries. Jamal (2004) mentioned that this is impor tant f or two r easons: ³fir st, in case of lease f acility, the machineries will r emain under the owner ship of leasing companies, who will have a bsolute authority and contr ol on their assets. Second, machineries will be impor ted in the name of a leasing company and letter of cr edit will be o pened against its name. So, over invoicing or under invoicing may be aver ted and ther e by mor e tr ans par ency will be ensur ed and tax evasion may be plugged´.
20. Conclusion
Banks and Non-Bank Financial Institutions ar e both key elements of a sound and sta ble financial system. Banks usually dominate the financial system in most countries because businesses, households and the pu blic sector all r ely on the bank ing system f or a wide r ange of financial pr oducts to meet their financial needs. However , by pr oviding additional and alter native financial services, NBFIs have alr eady gained consider a ble po pularity both in develo ped and develo ping 32
countries. In one hand these institutions hel p to f acilitate long-term investment and financing, which is of ten a challenge to the bank ing sector and on the other , the gr owth of NBFIs widens the r ange of pr oducts availa ble f or individuals and institutions with r esour ces to invest. Thr ough their o per ation NBFIs can mo bilize long-term f unds necessar y f or the develo pment of equity and corpor ate de bt mar kets, leasing, f actoring and ventur e ca pital. Another impor tant r ole which NBFI¶s play in an economy is to act as a buff er , es pecially in the moments of economic distr ess. An efficient NBFI sector also acts as a systemic risk mitigator and contributes to the over all goal of financial sta bility in the economy. NBFIs of Bangladesh have alr eady passed mor e than two and a half decades of o per ation. Des pite sever al constr aints, the industr y has perf ormed nota bly well and their r ole in the economy should be duly r ecognized. It is impor tant to view NBFIs as a catalyst f or economic gr owth and to pr ovide necessar y su ppor t f or their develo pment. A long term a ppr oach by all concer ned f or the develo pment of NBFIs is necessar y. Given a ppr o priate su ppor t, NBFIs will be a ble to play a mor e significant r ole in the economic develo pment of the countr y.
21. References
1. Asian Leasing Association (1998), ³Asian Leasing Convention´, Dhaka, 1998 2. Bakker , M. R and Gr oss, A (2004), ³Develo pment of Non- bank Financial Institutions and Ca pital 3. Mar kets in Eur o pean Union Accession Countries´, Wor ld Bank Wor ki ng Pa per No.28 4. Banerjee, P. K. and Mamun, A.A (2003), ³Lease Financing in Bangladesh´, BIBM R esear ch Pa per. 5. Bangladesh Bank, Annual R e por t (Various Issues) 6. Bangladesh Bank, Economic Tr ends (Various Issues) 7. Bangladesh Bank Quar ter ly (Various Issues)
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8. Bangladesh Bank (2006), ³Financial Sector R eview´, Vol.1, No.1, May, Policy Analysis Unit, 9. R esear ch De par t ment. 10. Bangladesh Leasing and Finance Companies Association (BLFCA)
Year Book (Various
Issues) 11. Bar ai, M. K., Saha, S., and Mamun, A. A (1999), ³Pr ogr ess and Pr os pects of Non-Bank Financial 12. Institutions in Bangladesh´, Bank Parik r ama, Vol. XXIV, No. 1 13. Chen
Y.C.
(2001), ³Lease Financing in Taiwan´, In Lisa Paul ed.: Wor ld Leasing
Yearbook 2001,
14. UK : Adrian Hor n br ook . 15. Choudhur y A. Q. (2001), ³Leasing in Bangladesh ± Pr o blems and Pr os pects´, The Daily Star , April 4, 2001. 16. Choudhur y A. Q. (2005), ³Spotlight on the NBFIs of Bangladesh´, pu blished in BLFCA Year Book
17. 2005. 18. Goldsmith, R.W. (1969), Financial Structure and Development , Yale Univer sity Pr ess, London. 19. Jamal, S.H. (2004), ³Bank ing and Leasing Complementar y to Each Other´, pu blished in BLFCA Year Book 2004. 20. IFC (1996), Leasing in Emerging Markets, Lessons of Ex perience Series 3. 21. Sannamat, M. A. H. (2004), ³Mer chant Banks of Bangladesh: Pr os pects and Pr o blems´, pu blished in 22. BLFCA Year Book 2004. 23. Sar ker , M. (2004), ³Managing a Non-Bank ing Financial Institutions ± Some Issues of Concer n´, 24. pu blished in BLFCA Year Book 2004. 25. K han, A.A. (2004), ³Leasing in Bangladesh´, pu blished in BLFCA Year Book 2004. 26. K han, A.A. (2005), ³Pr oduct Options f or Financial Institutions in Bangladesh´, pu blished in BLFCA 27. Year Book 2005. 34
28. Bangladesh Bank pu blication (Januar y 2009), Cha pter 4 :The Capital Market and NonBank Financial Sector
29. Financial Sector R eview (Fe br uar y, 2008), Volume III No. 1, Policy Analysis Unit, 30. Bangladesh Bank 31. Bangla pedia- National Encyclo pedia of Bangladesh 32. Daily News pa per s
22. Annexure: The listing of NBFIs
Name of Non-Bank Financia l Institution Year of Commencement
1 Industrial Pr omotion and Develo pment Company of Bangladesh Ltd (IPDC) 2 Saudi-Bangladesh Industrial and Agricultur al Investment Company Ltd (SABINCO) 3 Industrial Develo pment 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 Uttar a Finance and Investment Ltd 8 Inter national 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
