Overview of Non-Bank Financial Institute of Bangladesh

Non-Bank Financial Institutions (NBFIs), also termed as only Financial Institutions (FIs), have been
playing a crucial role by providing additional financial services that cannot be usually provided by the
banks. The NBFIs, with more multifaceted products and services have taken their place in the
competitive financial market to satisfy the changing demands of the customers. The NBFIs are
supervised by Bangladesh Bank through risk-based supervisory system (BB-2019).

NBFIs industry is considered the second highest source of loan and provider of different financial
services. The growing financial performance of this sector has a colossal effect on whole economy
performance. Typically, financial sector refers to mainly banking sector of any country. Recently the
efficiency of NBFIs industry has dramatically influencing the performance of banking sector. The
contribution of this industry toward the economy has been emerging and as facts suggest the
curiosity of investors has significantly increased. Consequently, the financial performance of this
sectors company has been in stakeholders’ prime apprehension in recent times.

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.

Structure of Non-Bank Financial Institutions in Bangladesh:

The authority of granting licenses to NBFIs and their control are vested in Bangladesh Bank by the
Financial Institutions Act, 1993. As per the Financial Institutions Regulation, 1994 issued by
Bangladesh Bank the minimum paid up capital requirement for establishing a financial institution is
BDT 1.0 billion. However, NBFIs' business line is narrow in comparison with banks in Bangladesh.
NBFIs cannot accept any such deposit as is repayable on demand through cheque, draft, or order of
the depositor. Therefore, they cannot provide operating account facilities like savings and current
deposits, cash credits, overdrafts, etc. NBFIs may access public funds, either directly or indirectly
through public deposits, commercial papers (CPs), debentures, and bank finance. However, they can
only take term deposits with a minimum maturity of 3 months or more. They are not covered under
the Deposit Insurance Scheme by the Bangladesh Bank. In addition, they are not allowed to deal in
gold and foreign exchange. Nonetheless, they may obtain foreign currency loan from abroad subject
to prior approval of the Bangladesh Bank. NBFIs are subject to the prudential guidelines/limits such
as income recognition; asset classification and provisioning norms; capital adequacy norms; single
and group borrower limits; prudential limits on capital market exposures; classification and valuation
norms for the investment portfolio; CRR/SLR requirements; accounting and disclosure norms and
supervisory reporting requirements issued by the Bangladesh Bank.

Products and Services Offered by Non-Bank Financial Institute of Bangladesh:

Non-Bank Financial Institutions play a key role in fulfilling the gap of financial services that are not
generally provided by the banking sector. The competition among NBFIs is increasing over the years,
which is forcing them to diversify to a wider range of products and services and to provide
innovative investment solutions. NBFIs appear to offer flexible options and highly competitive
products to help customers meet their operational and financial goals. The table below provides a
summary of the product range offered by existing NBFIs of Bangladesh.

Table 1: Different Products and Services of NBFIs

Type of Activity Key Features Target Market

Lease Financing
 Finance/ Capital Provide a long-term solution that allows customers to Corporate, SMEs, Individual
Lease free up working capital business enterprises

 Operational An operational lease entails the client renting an asset Corporate, SMEs, individual
Lease over a time period that is substantially less than the business enterprises
asset’s economic life. It offers short-term flexibility,
which may allow the customer to take advantage of
off-balance sheet accounting treatment.

 Hire Purchase A hire purchase is an alternative to a lending Clients that have an

transaction for the equipment purchase. It is usually established credit history
employed for retail or individual financing of smaller with the institution can
items, such as consumer products. However, hire manage the down payment
purchase option is also suitable for business houses and assume a stake in the
depending on tax practices. leasing agreement

 Leveraged Leases generally for large transactions involving three Mostly corporate houses.
Leases parties: a lessee, a lessor and a funding source. These
leases infuse third-party non-recourse debt
underwritten by the customer's ability to raise capital
in the public and private capital markets for a
significant portion of the cost.

 Synthetic Synthetic lease structure is generally provided for Mostly corporate houses
Leases property that retains value over an extended period of
time such as aircraft, railroad rolling stock,
manufacturing equipment and certain types of real
estate.
 Type of Activity Key Features Target Market
 Sale/Leaseback Ideal for customers looking to generate liquidity from Corporate, SMEs, individual
s their existing equipment and reinvest the proceeds business enterprises
back into the business.

House loan and real estate financing is extended for Individuals, Professionals,
Home Loan and Real purchase of apartment and house, construction of & Corporate Bodies
Estate Financing residential house, purchase of chamber and office
space for professionals, purchase of office space and
display centre, purchase and construction of
commercial building, real estate developer for
construction of apartment project. Mostly mid to long
term in nature.

Short Term Loans

Financing against invoices raised by the supplier after Small and medium size
 Factoring of making the delivery successfully. Major Features are companies having regular
Accounts Revolving Short Term Facility, Permanent Assignment supplies to corporate
Receivables of Payment, Financing against invoices, Post-delivery bodies.
Financing

Finance against the assignment of bill arising out of Medium and large clients
 Work Order work orders on a revolving basis. The company shall with continuous flow of
Financing take assignment of suitable work orders and / or work orders from
invoices and finance the client against those. customers.

Corporate Finance
Bridge Finance is a kind of Short-Term Finance Company going for an IPO
 Bridge Finance extended in anticipation of immediate long term or expecting to avail a long-
financing such as public issue, private placement, loan term loan or Working
syndication, lease syndication, loan, lease & Capital within one year or
debenture. so.

Making available a large financing for a corporate Financing new large

 Syndication of client. Arrange syndicated financing in the mode of project; Financing BMRE
Large Loans loan, lease, equity, working capital, or any (Balancing, Modernization,
combination thereof. Particularly useful for large Replacement and
projects requiring large scale investment and no single Expansion); Refinancing a
financier wants to take the whole risk. Example: large project.
Greenfield project.

Advisory services are comprehensive financial, All large corporate houses

 Advisory economic and strategic advice to companies for
Services growth, profitability, and sustainability. This includes
providing wide range of services, such as corporate
counselling, project counselling, capital restructuring,
financial engineering, diagnosing financial problems.
 Type of Activity Key Features Target Market
 Merger and Help find appropriate organization for best possible Medium and large
Acquisition synergy, conduct valuation of companies and select corporate bodies
suitable merger and acquisition methods, negotiate
and execute deal beneficial for all the parties involved.

 Securitisation Securitisation is the issuance of financial instruments All corporate bodies

backed by assets and/or cash flows. This is one of the
modern financial services, which solves specific type
of financial needs of business organizations.
Merchant Banking

 Issue The Issue Management group is capable of devising All corporate bodies
Management innovative solution for raising capital – debt e.g.
placement of bonds and debentures and raising equity
through private and public placement – from the
market suiting the unique needs and constraints of
the corporate clients.

 Underwriting Underwriting refers to the guarantee by the All corporate bodies

underwriters that in the event of under-subscription,
the underwriter will take up the under-subscribed
amount on pro-rata basis upon payment of price of
that option.

 Portfolio Merchant banks allow small investors to open investor Individuals, Professionals,
Management account with merchant banks and provide support for &
the purchase and sales of shares. Clients shall have Corporate Bodies
absolute discretionary power to make investment
decisions.

 Corporate Through corporate advising, the merchant bank helps All corporate bodies
Advising the issuer analyses its financing needs and suggest
various ways to raise needed funds.
Securities Services

 Brokerage Provide services for Trade Execution (Dhaka and All corporate bodies
Services Chittagong Stock Exchanges), Pre -IPO private
placement, Asset allocation advice, Opportunities for
trading in different financial instruments

 CDBL Services Apart from the brokerage services, securities services Individuals, Professionals,
as full service also provide the services like BO (Beneficial Owner) & Corporate Bodies
Depository accounts opening and maintenance,
Participant (DP) Dematerialization, Re-materialization, Transfers and
multiple accounts movement, Lending and borrowing
etc.

Source: Compiled from Khan (2005)

Banks’ Entry in Non-Bank Financial Activity

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 activities 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. (BLFCA,2004)

Present Condition of Non-Bank Financial Institution of Bangladesh:

 References

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

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

Bangladesh Leasing and Finance Companies Association (BLFCA) Year Book 2004 (Various Issues).

Bangladesh Bank, Annual Report, 2019,2018