An Analytical insight on the financial system in Bangladesh
Chapter One: - Introduction Origin of the report This report is prepared as the partial fulfillment of BBA program under National University, Bangladesh. The origin of the report includes a comprehensive study on the overall financial system of Bangladesh. It attempts to analyze the contributions of different institution in our financial market and to the flow of fund from the supplier to borrower i.e. from surplus units to the deficit units. This also attempts to analyze the different and separate entities and participants of the financial system of Bangladesh. Its usually includes the analysis of performance of those institutions as well as the regulatory bodies available to regulate their activities. Scope of the report This report covers the following different areas and modules •
The financial system of Bangladesh
•
The activities of financial institutions in Bangladesh
•
The operations of the financial market in Bangladesh
•
The regulatory bodies and legal framework within which it operates
•
The performance and contributions of these financial institutions in Bangladesh
Methodology of the report The methodology of the report is an analytical observation of the flow of funds and operations of the financial market and instructions in Bangladesh. This report is
prepared on the basis of secondary information. The analysis on the basis of published yearly report of different bodies of the respective sectors. Objectives of the report •
To analyze the operational flow of money in Bangladesh
•
To evaluate the effectiveness of the financial system in Bangladesh
•
To illustrate the overall performance of the financial system in Bangladesh
•
To establish some new systematic and more effective flow of fund and the utilization of those funds
Sources of Information The information included in the report is mostly collected from secondary sources. The published reports on the financial system in Bangladesh by different professional institution are being used to conduct the study. The performance analysis and interpretation of the information are based on the yearly and other periodic report of different sectors of financial system in Bangladesh. Other valuable information is collected from different research paper/article and other secondary sources. Some of the information also collects from different wed sites of the different institutions involved in financial system in Bangladesh. Limitations of the report The report was completed and submitted in time despite of the following limitations •
A comprehensive study to collect primary information could no possible
•
The sources of information was not up to date, that why we had to relay on some back dated information
•
A detailed graphical and mathematical analysis is overlooked because of the time constraints
•
There is a clear conflicting arguments between the govt. and non-govt. published report on financial system in Bangladesh
•
We had to use our own judgments in some cases when we didn’t have any clear idea about the reliability of the in formation.
Chapter
Two:
-
A
brief
over view of
Financial
System
in
Bangladesh The financial system in a country is subject to a set of various participants and different bodies that helped to operate the financial system of a country under the close supervisions of regulatory bodies. The regulatory bodies and participants may be differing from country to country. In Bangladesh, the Ministry of Finance, the Bangladesh Bank, the Securities and Exchange Commission (SEC) etc. are the major regulatory bodies exercising the regulatory control and supervision over the functioning of the financial system in the country. The different participants or entities involved in the financial system of Bangladesh and originated the operations of the financial system can be shown by the following simple diagram
Regulatory Bodies
Savers (Investors
Cash
Spender s
Financial Securities Intermediarie s Regulatory Bodies
Figure: Representation of origin of financial system
The financial system of Bangladesh consists of Bangladesh Bank (BB) as the central bank, 4 State Owned Commercial Banks (SCB), 5 government owned specialized banks, 30 domestic private banks, 9 foreign banks and 29 non-bank financial institutions. Moreover, MRA has given license to 298 Micro-credit Organizations. The financial system also embraces insurance companies, stock exchanges and co-operative banks. Slide 1:
Central Bank
Slide 2:
Banking Sector
Slide 3:
Non-banking Financial Institutions (NBFIs)
Slide 4:
Capital Market
Slide 5:
Microfinance Institutions (MFIs)
Except for the transformation of three nationalized commercial banks into public limited companies which are now known as state-owned commercial banks (SCBs), the structure of the financial system remains almost unchanged since June5. Bangladesh's financial sector consists of the Bangladeshi Bank (the central bank), four nationalized commercial banks (NCBs), 5 state-owned specialized banks (SBs), more than 30 private sector commercial banks (PCBs) and more than 9 foreign commercial banks (PCBs). The rest of the financial sector consists of more than 29 non-bank financial institutions, the capital market, the insurance companies, the cooperative banks and the micro-finance institutions. Activities in the financial sector which was dominated by the inefficient NCBs a few years back are being replaced by the relatively more efficient PCBs and PCBs. The share of the financial sector in GDP is about 1.70% (FY06), which has remained quite steady over time. The contribution to GDP mostly comes from the banking sector. Its share in GDP has declined from 1.35 per cent in FY1995 to 1.27 in FY 2006. The contribution of insurance to GDP, although has shown a rising trend, is less than 0.40 per cent. Overall employment in the financial sector is about 0.10 million with the private sector employment rising while the public sector employment falling. Currently, the sector contributes about 1.50 per cent in government revenue.
Chapter T hree: - Central Bank/Bangladesh Bank and its Policy 3.1 About the Bangladesh Bank Bangladesh Bank (BB), as the central bank, has legal authority to supervise and regulate all banks and non-bank financial institutions. It performs the traditional central banking roles of note issuance and of being the banker to the government and banks. Given some broad policy goals and objectives, it formulates and implements monetary policy manages foreign exchange reserves and lays down prudential regulations and conduct monitoring thereof as they apply to the entire banking system. Its prudential regulations include, among others: minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. The Bangladesh Bank has the power to impose penalties for noncompliance and also to intervene in the management of a bank if serious problem arise. It also has the delegated authority of issuing policy directives regarding the foreign exchange regime. Bangladesh Bank, the central bank of the country, was established as a body corporate vide the Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972) with effect from 16th December, 1971. The general superintendence and direction of affairs and business of the Bank are entrusted to a nine member Board of Directors which consists of the Governor as chairman, a Deputy Governor, three senior government officials and four persons having experience and proven capacity in the fields of banking, trade, commerce, industry or agriculture - all nominated by the government. The board, which is the highest policy making body, meets at least six times a year and at least once every quarter under the chairmanship of the Governor. The Governor, appointed by the government as the chief executive officer, directs and controls all the affairs of the Bank on behalf of the Board. The broad objectives of the Bank are:
•
To regulate the issue of the currency and the keeping of reserves;
•
To manage the monetary and credit system of Bangladesh with a view to stabilizing domestic monetary value;
•
To preserve the par value of the Bangladesh Taka;
•
To promote and maintain a high level of production, employment and real income in Bangladesh; and to foster growth and development of the country's productive resources for the national interest
Vision The Bangladesh Bank (BB), through ensuring the quality of services and the competence of its staff, shall operate as a modern, dynamic, effective, and forwardlooking central bank to manage the country’s monetary and financial system with a view to stabilizing the internal and external value of Bangladesh Taka conducive to rapid growth and development of the economy. Missions To uphold the vision and in pursuant with the Bangladesh Bank Order of 1972, Bangladesh Bank’s mission is to promote and maintain macroeconomic and price stability through: •
Formulating and implementing appropriate monetary policy consistent
•
with the country’s national development goals; Pursuing prudent policies to ensure stable internal and external value of
•
Taka; Identifying policy priorities for implementation by the Government through assessing the transmission channels and the interactions of monetary policy with fiscal, exchange rate, and other macroeconomic
•
policies and their impact on the economy; Proposing necessary legislative measures to attain the central bank’s objectives and perform its functions including strategies and regulations for and supervision of banking companies and financial institutions with the aim to providing efficient financial intermediation and financial services to large, medium, small, and micro enterprises and to pro-poor
•
activities ; Promoting, regulating and ensuring a secure and efficient payment
•
system, including the issue of Bank Notes; Giving advice to the Government on the interaction of monetary policy with fiscal and exchange rate policies, on the impact of various policy
•
measures on the economy; Analyzing priority macroeconomic
issues
for
policy
advice
and
dissemination of information to attain the central bank’s social responsibility. To this end, BB would ensure that it has the requisite human and infrastructural resources and build its capability to promote and ensure a robust and well-functioning financial sector. This mission statement pledges that the guiding philosophy of BB’s operations would be sound regulatory framework conducive to the operation of efficient market mechanism along with transparency and accountability, professionalism, ethical standards, adoption of modern technology in operational and decision making processes, and trust and respect in all relations. Periodic strategic planning would serve to identify the emerging challenges, key changes affecting BB’s internal and external environment and set its strategic guidelines, set priorities, promote improvements in management practices, and induce necessary changes in organizational culture.
3.2 The policies of Bangladesh Bank To fulfill its mission, BB would undertake activities related to developing the national financial system and management of monetary, foreign exchange, and credit policies. The Bangladesh Bank’s core mission strategies cover both monetary policy and financial sector developments. 3.2.1 Monetary Policy The aim is to achieve the twin goals of containing inflation and promoting sustained and stable economic growth; provide policy advice to the Government on deficit financing and public debt management; manage the balance of payments and foreign exchange reserves; provide payment services and ensure the stability of the financial
system; conduct treasury and government securities related operations; and efficiently perform other international financial activities. 3.2.2 Financial Sector Developments Critical activities cover the development of the financial systems; provide effective prudential
supervision;
ensure
information
access,
market
intelligence,
and
contingency planning to avoid systematic risks; assist banking and financial entities to become efficient and competitive; discover new modalities for delivering agricultural and industrial term credit; enhance the access of small and medium enterprises to investment funds; further develop the market in public and private debt and risk capital; and promote measures for inclusion of people hitherto bypassed in formal financial systems. In addition, the Bangladesh Bank will continuously adopt necessary measures for taking a proactive stance in decision making; compiling relevant statistics and conducting high quality and timely economic research to review the country’s financial and economic conditions to support decision making; ensuring efficient and professional management of BB’s human and financial resources; and establishing BB’s distinct identity based on its values and strategic roles. In order to uphold the mission, Bangladesh Bank’s aim would be to provide the required leadership by discharging its duties in a manner that shows a clear vision, is watchful, far-sighted, intelligent and responsive based on an effective and efficient communication strategy. At all times, BB’s aim would be to remain committed, efficient, capable, logistically supported, speedy, focused, and aggressive where necessary in order to ensure that the Bangladesh Bank always remains a credible and prestigious institution with an efficient organizational structure committed to achieving its goals. 3.2.3 Interest Rate Policy
Under the Financial sector reform program, banks are free to charge/fix their deposit (Bank /Financial Institutes) and Lending (Bank /Financial Institutes) rates other than Export Credit. At present, Loans at reduced rates (7%) are provided for all sorts of export credit since January 2004. With a view to controlling the price hike and ensuring adequate supply of essential commodities, the rate of interest on loan for import financing of rice, wheat, sugar, edible oil (crude and refined), chickpeas, beans, lentils, onions, spices , dates and powder milk has been temporarily fixed to a maximum of 12%. Now, banks can differentiate interest rate up to 3% considering comparative risk elements involved among borrowers in same lending category. With progressive deregulation of interest rates, banks have been advised to announce the mid-rate of the limit (if any) for different sectors and the banks may change interest 1.5% more or less than the announced mid-rate on the basis of the comparative credit risk. Recently Banks have been advised to upload their deposit and lending interest rate in their respective website. 3.2.4 Capital Adequacy of the Banks With a view to strengthening the capital base of banks and making them prepare for the implementation of Basel-II Accord, banks are required to maintain Capital to RiskWeighted Assets ratio 10% at the minimum with core capital not less than 5% effective from December 31, 2007. However, minimum capital requirement (paid up capital and statutory reserve) for all banks will be Tk.200 crore as per Bank Company (Amendment) Ordinance, 2007. Banks having capital shortfall will have to meet at least 50% of the shortfall by June, 2008 and the rest by June, 2009. Revaluation reserves of held to maturity (HTM) securities (up to 50% of the revaluation reserves) has been added to the components of supplementary capital. Besides, 'Hedging the price risk of commodity transactions' has been included in Short-term self liquidating trade related contingencies. 3.2.5 Loan Classification and Provisioning
In order to strengthen credit discipline and bring classification and provisioning regulation in line with international standard, Bangladesh Bank issued a master circular on loan classification and provisioning through BRPD circular no 5 dated June 5, 2006. The revised policy covers an independent assessment of each loan on the basis of objective criteria and qualitative factors which is appended below: Any Continuous Loan/Demand Loan if not repaid/renewed within the fixed expiry date for repayment will be treated as past due/overdue from the following day of the expiry date. A Continuous Loan/Demand loan/Term Loan which will remain overdue for a period of 90 days or more will be put into the "Special Mention Account (SMA)". Interest accrued on "Special Mention Account (SMA)" will be credited to Interest Suspense Account, instead of crediting the same to Income Account. A Continuous Loan/Demand loan is classified as 'Sub-standard' if it is past due/over due for 6 months or beyond but less than 9 months, classified as `Doubtful' if it is past due/over due for 9 months or beyond but less than 12 months and classified as `Bad/Loss' if it is past due/over due for 12 months or beyond. If any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid within the due date, the amount of unpaid installment(s) will be termed as `defaulted installment'. In case of Fixed Term Loans, which are repayable within maximum five years of time- If the amount of 'defaulted installment' is equal to or more than the amount of installment(s) due within 6 (six) months, the entire loan will be classified as "Sub-standard", if the amount is equal to or more than the amount of installment(s) due within 12 (twelve) months, the entire loan will be classified as "Doubtful" and if the amount is equal to or more than the amount of installment(s) due within 18 (eighteen) months, the entire loan will be classified as "Bad/Loss". In case of Fixed Term Loans, which are repayable in more than five years of time and if the amount of 'defaulted installment' is equal to or more than the amount of
installment(s) due within 12 (twelve) months, the entire loan will be classified as "Substandard". If the amount is due within 18 (eighteen) months, the entire loan will be classified as "Doubtful" and if the amount is due within 24 (twenty four) months, the entire loan will be classified as "Bad/Loss". The Short-term Agricultural and Micro-Credit will be considered irregular if not repaid within the due date as stipulated in the loan agreement. If the said irregular status continues, the credit will be classified as 'Substandard ' after a period of 12 months, as 'Doubtful' after a period of 36 months and as 'Bad/Loss' after a period of 60 months from the stipulated due date as per loan agreement. Besides, if any situational changes occur in the stipulations in terms of which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if the value of the securities decreases or if the recovery of the loan becomes uncertain due to any other unfavorable situation, the loan will have to be classified on the basis of qualitative judgment. As regards the provision, banks are required to maintain General Provision against all categories of loans along with off-balance sheet items in the following manner:
Particulars
Short
Consumer Financing
Term
Other thanHousing Loans
Agri.
Housing
Credit
Finance
and
Loans
micro
Professional
credit
s to set up
Small
All
forEnterpris Credit
Finance Professiona e & for
ls to set upFinancing business
business UC
Standar 5%
other
5%
2%
2%
1%
1%
d SMA
-
5%
5%
5%
5%
5%
SS
5%
20%
20%
20%
20%
20%
Classified
DF
5%
50%
50%
50%
50%
50%
B/L
100%
100%
100%
100%
100%
100%
Besides, banks are required to maintain general provision against Off-balance sheet exposures in the following manner: (i)
@ 0.5% provision effective from December 31, 2007 and
(ii)
@ 1% provision effective from December 31, 2008.
Other instructions such as Eligible securities in determining base for provision along with a revised format for submitting the report on classification of loans and advances are also provided in the respective circulars. Reference: •
BRPD circular no: 05, dated June 5, 2006.
•
BRPD circular no: 08, dated August 07, 2007
•
BRPD circular no: 10, dated September 18, 2007
•
BRPD circular no: 05, dated April 29, 2008
3.2.6 Foreign Exchange System On March 24, 1994 Bangladesh Taka (domestic currency) was declared convertible for current transactions in terms of Article VIII of the IMF Articles of Agreement. Consequent to this, current external settlements for trade in goods and services and for amortization payments on foreign borrowings can be made through banks authorized to deal in foreign exchange, without prior central bank authorization. However, because resident owned capital is not freely transferable abroad (Taka is not yet convertible on capital account), some current settlements beyond certain indicative limits are subject to bonfires checks. Direct investments of non-residents in the industrial sector and portfolio investments of non-residents through stock exchanges are reparable abroad, as also are capital gains and profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior Bangladesh Bank approval, which is allowed only sparingly.
3.2.7 Exchange Rate Policy The exchange rate policy of Bangladesh Bank aims at maintaining the competitiveness of Bangladeshi products in the international markets, encouraging inflow of wage earners' remittances, maintaining internal price stability, and maintaining a viable external account position. Prior to the inception of floating exchange rate regime, adjustments in exchange rates were made while keeping in view the trends of Real Effective Exchange Rate (REER) index based on a trade weighted basket of currencies of major trading partners of Bangladesh and the trends of other important internal and external sector indicators. Under the existing floating exchange rate regime (that started from 31/05/2003), the interbank foreign exchange market sets the exchange rates for customer transactions and interbank transactions based on demand-supply interplay; while the exchange rates for the Bangladesh Bank's spot purchase and sales transactions of US Dollars with ADs is decided on a case to case basis. Bangladesh Bank does not undertake any forward transaction with ADs. The ADs are free to quote their own spot and forward exchange rates for interbank transactions and for transactions with non-bank customers. However, along with intervention in the taka money market, the US dollar purchase or sale transactions take place by the Bangladesh Bank as needed, to maintain orderly market conditions. 3.2.8 Bank Licensing Bank Company Act, 1991, empowers BB to issue licenses to carry out banking business in Bangladesh. Pursuant to section 31 of the Act, before granting a license, BB needs to be satisfied that the following conditions are fulfilled: "that the company is or will be in a position to pay its present or future depositors in full as their claims accrue;
that the affairs of the company are not being or are not likely to be conducted
in a manner detrimental to the interest of its present and future depositors;
that, in
the case of a company incorporated outside Bangladesh, the Government or law of the country in which it is incorporated Bangladesh as the Government or law of Bangladesh grants to banking companies incorporated outside Bangladesh and that the company complies with all applicable provisions of Bank Companies Act, 1991."
Licenses may be cancelled if the bank fails to comply with above provisions or ceases to carry on banking business in Bangladesh.
Chapter Four: - Banking Sector in Bangladesh The Jews in Jerusalem introduced a kind of banking in the form of money lending before the birth of Christ. The word 'bank' was probably derived from the word 'bench' as during ancient time Jews used to do money -lending business sitting on long benches. First modern banking was introduced in 1668 in Stockholm as 'Savings Pis Bank' which opened up a new era of banking activities throughout the European Mainland. In the South Asian region, early banking system was introduced by the Afghan traders popularly known as Kabuliwallas. Muslim businessmen from Kabul, Afghanistan came to India and started money lending business in exchange of interest sometime in 1312 A.D. They were known as 'Kabuliawallas'.
4.1 Number and Types of Banks The number of banks in all now stands at 49 in Bangladesh. Out of the 49 banks, •
Four are Nationalized Commercial Banks (NCBs),
•
28 local private commercial banks,
•
12 foreign banks and
•
Five are Development Financial Institutions (DFIs).
On the basis of contribution to the financial market •
Sonali Bank is the largest among the NCBs
•
While Pubali is leading in the private ones.
•
Among the 12 foreign banks, Standard Chartered has become the largest in the country.
Besides the scheduled banks, there are four others banks functioning in the financial sector, these are
•
Samabai (Cooperative) Bank,
•
Ansar-VDP Bank,
•
Karmasansthan (Employment) Bank and
•
Grameen bank.
The number of total branches of all scheduled banks is 6,038 as of June 2008. Of the branches, 39.95 per cent (2,412) are located in the urban areas and 60.05 per cent (3,626) in the rural areas. Of the branches NCBs hold 3,616, private commercial banks 1,214, foreign banks 31 and specialized banks 1,177.
4.2 Services provided by the participants of banking sector in Bangladesh 4.2.1 Accounts, Current, FDR, PDS, Deposit Scheme Current Account: Generally this sort of account opens for business purpose. Customers can withdraw money once or more against their deposit. No interest can be paid to the customers in this account. If the amount of deposit is below taka 1,000 on an average the bank has authority to cut taka 50 from each account as incidental charge after every six months. Against this account loan facility can be ensured. Usually one can open this account with taka 500. One can open this sort of account through cash or check/bill. All the banks follow almost the same rules for opening current account. 4.2.2 Savings Bank Account Usually customers open this sort of account at a low interest for only security. This is also an initiative to create people's savings tendency. Generally, this account is to be opened at taka 100. Interest is to be paid in June and December after every six months. If money is withdrawn twice a week or more than taka 10,000 is withdrawn (if 25% more compared to total deposit) then interest is not paid. This account guarantees loan. Almost all the banks follow the same rules in the field of savings account, except foreign
banks for varying deposit. On an average, all the banks give around six percent interest. 4.2.3 Special Services Some Banks render special services to the customers attracting other banks. 4.2.4 Internet Banking Customers need an Internet access service. As an Internet Banking customer, he will be given a specific user ID and a confident password. The customer can then view his account balances online. It is the industry-standard method used to protect communications over the Internet. To ensure that customers' personal data cannot be accessed by anyone but them, all reporting information has been secured using Version and Secure Sockets Layer (SSL). 4.2.5 Home Banking Home banking frees customers of visiting branches and most transactions will be automated to enable them to check their account activities transfer fund and to open L/C sitting in their own desk with the help of a PC and a telephone. 4.2.6 Electronic Banking Services for Windows (EBSW) Electronic Banking Service for Windows (EBSW) provides a full range of reporting capabilities, and a comprehensive range of transaction initiation options. The customers will be able to process all payments as well as initiate L/Cs and amendments, through EBSW. They will be able to view the balances of all accounts, whether with Standard Chartered or with any other banks using SWIFT. Additionally, transactions may be approved by remote authorization even if the approver is out of station. 4.2.7 Automated Teller Machine (ATM)
Automated Teller Machine (ATM), a new concept in modern banking, has already been introduced to facilitate subscribers 24 hour cash access through a plastic card. The network of ATM installations will be adequately extended to enable customers to nonbranch banking beyond banking. 4.2.8 Tele Banking Tele Banking allows customers to get access into their respective banking information 24 hours a day. Subscribers can update themselves by making a phone call. They can transfer any amount of deposit to other accounts irrespective of location either from home or office. 4.2.9 SWIFT SWIFT is a bank owned non-profit co-operative based in Belgium servicing the financial community worldwide. It ensures secure messaging having a global reach of 6,495 Banks and Financial Institutions in 178 countries, 24 hours a day. SWIFT global network carries an average 4 million message daily and estimated average value of payment messages is USD 2 trillion. SWIFT is a highly secured messaging network enables Banks to send and receive Fund Transfer, L/C related and other free format messages to and from any banks active in the
network.
Having SWIFT facility, Bank will be able to serve its customers more profitable by providing L/C, Payment and other messages efficiently and with utmost security. Especially it will be of great help for our clients dealing with Imports, Exports and Remittances etc.
4.3 Banks of Bangladesh at a glance Nationalized Commercial Banks (NCBs) Name
Number
ofDeposits
Special Services
1. Sonali Bank
branches 1299
(As of June, 2000) Taka 168,187 million
Industrial, Agri loan, Poverty
2. Janata Bank
898
Taka 96,000 million
alleviation, etc. Industrial &
3. Agrani Bank
903
Taka 100,000 million
Poverty alleviation, etc. Industrial & agri loan,
agri
loan,
4. Rupali Bank
513
Taka 42,485 million
poverty alleviation, etc. Industrial & Agri loan, etc.
350 198 66 76 79 61(60+1) 60(58+2) 110 34
Taka Taka Taka Taka Taka Taka Taka Taka Taka
Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial
Private Banks 1. 2. 3. 4. 5. 6. 7. 8. 9.
Pubali Bank Uttara Bank National Bank Ltd. The City Bank Ltd. United Commercial Bank Ltd. Arab Bangladesh Bank Ltd. IFIC Bank Ltd. Islami bank Bangladesh Ltd. Al Baraka Bank Bangladesh
27,000 million 21,979 million 20,850 million 13,750 million 10,000 Million 13,206 million 17,032 million 27,750 million 9,000 million
& & & & & & & & &
agri agri agri agri agri agri agri agri agri
loan, loan, loan, loan, loan, loan, loan, loan, loan,
etc. etc. etc. etc. etc. etc. etc. etc. etc.
Ltd. 10. Eastern Bank Ltd. 21 11. National Credit & Commerce 30
Taka 12,600 million Taka 9,700 million
Industrial & agri loan, etc. Industrial & agri loan, etc.
Bank Ltd. 12. Prime Bank Ltd. 23 13. Southeast Bank Ltd. 12 14. Dhaka Bank Ltd. 12 15. Al-Arafah Islami Bank Ltd. 35 16. Social Investment Bank Ltd. 65 17. Dutch-Bangla Bank Ltd. 8 18. Mercantile Bank Ltd. 12 19. Standard Bank Ltd. 8 20. One Bank Ltd. 4 21. EXIM Bank 5 22.Bangladesh Commerce Bank24
Taka 8,550 million Taka 7,140 million Taka 7,290 million TK.7400 Million Taka 5,250 million Taka 4,715 million Taka 4,300million Taka 1,739million Taka 2,200million Taka 2,600 million Taka 400 million
Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial
& agri loan, & agri loan, & agri loan, & agri loan, & agri loan, & agri loan, & agri loan, & agri loan, & agri loan, loan, etc. & agri loan,
Taka Taka Taka Taka Taka
Industrial Industrial Industrial Industrial Industrial
& agri loan, etc. & agri loan, etc. & agri loan, etc. loan, etc. loan, etc.
Ltd. 23. Mutual Trust Bank Ltd. 3 24.First Security Bank Ltd. 4 25. The Premier Bank Ltd. 6 26. Bank Asia Ltd. 4 27. The Trust Bank Ltd. 10 28. Shah Jalal Bank Limited (Based
700 million 1,200million 1,500million 625 million 980 million
on Islamic Shariah)
Foreign Banks 1. American Express Bank 2. Standard Chartered
Taka 7,080million Taka 11,329 million
Industrial loan, etc. Industrial loan, etc.
2 1 (The2
Taka 1,041million Taka 805 million Taka 6,750 million
Industrial loan, etc. Industrial loan, etc. Industrial loan, etc.
Bank) 6. National Bank of Pakistan 1 7. Muslim Commercial Bank Ltd. 2 8. City Bank NA 1
Taka 165 million Taka 870 million Taka 2,447 million
Industrial loan, etc. Industrial loan, etc. Industrial loan, etc.
Grindlays Bank 3. Habib Bank Ltd. 4. State Bank Of India 5. Credit Agricole Indosuez
3 6
etc. etc. etc. etc. etc. etc. etc. etc. etc. etc.
9. Hanvit Bank Ltd. 1 10. HSBC Ltd. 2 11. Shamil Bank of Bahrain E.C.1
Taka 368 million Taka 2,400 million Taka 1,000million
Industrial loan, etc. Industrial loan, etc. Industrial loan, etc.
(Islami Banker) 12. Standard Chartered Bank
Taka 10,961 million
TT free of charges, ATM,
5 branches
Money Link, Tele Banking, Electronic Banking
Specialized /Development Banks Out of the 5 specialized banks, 2(Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit need of the agricultural sector while the other two (Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) ) are for extending term loans to the industrial sector of Bangladesh. 1. Bangladesh Krishi Bank 2.RajshahiKrishiUnnayan Bank 3. Bangladesh Shilpa Bank 4. Bangladesh Shilpa Rin Sangstha 5.Bank of
850 301 15 5
Small Industries & 25
Taka Taka Taka Taka
29,890 million 4,800 million 646 million 150 million
Taka 6,466 million
Commerce Bangladesh Ltd.
Industrial Industrial Industrial Industrial
& & & &
agri agri agri agri
loan, loan, loan, loan,
etc. etc. etc. etc.
Small Industrial & agri loan, etc.
Other 1. Ansar VDP Unnayan Bank 2. Bangladesh
Samabai
Ltd. (BSBL) 3. Grameen Bank 4.Karmasansthan
100 Bank*** 1148
Bank
32
Taka 18 million
Small Industrial & agri loan,
Taka 22 million
etc. Small Industrial & agri loan,
Taka 5,655 million
etc. Small Industrial & agri loan,
Taka 18 million
etc. Small Industrial & agri loan, etc
The commercial banking system dominates the financial sector with limited role of NonBank Financial Institutions and the capital market. The Banking sector alone accounts for a substantial share of assets of the financial system. The banking system is dominated by the 4 State Owned Commercial Banks, which together controlled more than 30% of deposits and operates 3383 branches (50% of the total) as of June 30, 2008.
Chapter Five: - Non-Bank Financial Institutions (NBFIs) Non-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. In relatively advanced economies there are different types of non-bank financial institutions namely insurance companies, finance companies, investment banks and those dealing with pension and mutual funds, though financial innovation is blurring the distinction between different institutions. In some countries financial institutions have adopted both banking and non-banking financial service packages to meet the changing requirements of the customers. In the Bangladesh context, NBFIs are those institutions that are licensed and controlled by the Financial Institutions Act of 1993 (FIA ’93). NBFIs give loans and advances for industry, commerce, agriculture, housing and real estate, carry on underwriting or acquisition business or the investment and re-investment in shares, stocks, bonds, debentures or debenture stock or securities issued by the government or any local authority; carry on the business of hire purchase transactions including leasing of machinery or equipment, and use their capital to invest in companies. The importance of NBFIs can be emphasized from the structure of the financial system. In the financial system of Bangladesh, commercial banks have emerged in a dominant role in mobilizing funds and using these resources for investment. Due to their structural limitations and rigidity of different regulations, banks could not expand their operations in all expected areas and were confined to a relatively limited sphere of financial services.
Moreover, their efforts to meet long term financing with short term resources may result in asset-liability mismatch, which can create pressure on their financial base. They also could not broaden their operational horizon appreciably by offering new and innovative financial products. These drawbacks led to the emergence of NBFIs in Bangladesh for supporting industrialization and economic growth of the country. The purpose of this paper is to highlight different features of NBFIs, their contribution to the overall economy and product base of NBFIs. The paper also describes the performance of NBFIs measured by different financial indicators, along with the effects of banks’ entry into the non-bank financing area. Special emphasis has been given to identify the challenges faced by NBFIs in Bangladesh. Finally, development of NBFIs as well as their role in strengthening the financial system has been discussed. The analyses have been conducted on the basis of the secondary data obtained from different sources like NBFIs, Bangladesh Bank, Leasing Year Book etc.
5.1 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. Out of these, one is government owned, 15 are local (private) and the other 13 are established under joint venture with foreign participation.
5.2 Recent Development and Activities of NBFIs The major business of most NBFIs in Bangladesh is leasing, though some are also diversifying into other lines of business like term lending, housing finance, merchant banking, equity financing, venture capital financing etc. Lease financing, term lending and housing finance constituted 94 percent of the total financing activities of all NBFIs up to June 2006. A break-up of their financing activities reveals that the shares of leasing and housing finance in the total investment portfolio of NBFIs have gradually decreased from 59 and 15 percent, respectively, in 2002 to 46 and 14 percent in June 2006. The share of term loans, on the other hand, has increased from 20 percent to 34 percent during the same period implying increased focus on the former. The evolvement of NBFI business activity is observed in Figure 1. It can also be seen from the figure that the portfolio mix of NBFIs has become quite stable from 2004.
Figure : Overview of financing provided by NBFIs in different sector
Source: Authors’ calculation from data provided by Financial Institution Department, Bangladesh Bank.
NBFIs offer
services to various
sectors such as textile, chemicals,
services,
pharmaceuticals, transport, food and beverage, leather products, construction and engineering etc. The percentage of the sector wise distribution of NBFIs investment in 2005 is given in Figure 2. Although an individual NBFI may have a different portfolio as per its business strategy, the aggregated data shows that NBFIs mainly focus on real estate & housing (13%), power & energy (12%), textile (11%) and transport sector (9%). Service (finance and business) is another area of importance for NBFIs. From the perspective of broad economic sectors, investment in the industrial sector (42%) dominated that in the service sector (33%) in 2005. NBFIs are also exploring other sectors namely ‘pharmaceuticals & chemicals’, ‘iron, steel & engineering’, ‘garments & accessories’, ‘food & beverage’ and ‘agro industries & equipment’. The weight of these sectors is 23 percent of the total portfolio. Source: BLFCA Year Book-2007
5.3 Products and Services Offered by NBFIs 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.
Type of Activity
Key Features
Target Market
Lease Financing Finance/
Provide
a
long-term
solution
that
Capital
allows customers to free up working
Lease
capital
Corporate, SMEs, Individual business enterprises. Corporate, SMEs,
Operational
An operational lease entails the client
individual business
Lease
renting an asset over a time period
enterprises.
that is substantially less than the asset’s economic life. It offers shortterm flexibility, which may allow the customer to take advantage of offbalance sheet accounting treatment.
Clients that have an
Hire Purchase
established credit A hire purchase is an alternative to a
history with the
lending transaction for the equipment
institution can
purchase. It is usually employed for
manage the down
retail smaller
or
individual
items,
such
financing as
of
consumer
payment and assume a stake in
products. Leveraged
However,
hire
purchase
the leasing
option is also suitable for business
agreement.
houses depending on tax practices.
Leases
Mostly corporate Leases generally for large transactions
houses
involving three 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 Synthetic
and private capital markets for a
Leases
significant portion of the cost. Mostly corporate Synthetic lease structure is generally
houses
provided for property that retains value over an extended period of time such as aircraft, railroad rolling stock, Sale/Leasebac
manufacturing equipment and certain
ks
types of real estate. Corporate, SMEs, Ideal
for
customers
looking
to
generate liquidity from their existing
individual business enterprises
equipment and reinvest the proceeds Home Loan and
back into the business. House loan and real estate financing
Individuals,
Real Estate
is extended for purchase of apartment
Professionals, &
Financing
and house, construction of residential
Corporate Bodies
house, purchase of chamber and office space for professionals, purchase of office
space
purchase
and
and
display
center,
construction
of
commercial
building,
developer
for
real
estate
construction
of
apartment project. Mostly mid to long term in nature. Short
Term
Loans Financing against invoices raised by
Small and medium
Factoring of
the supplier after making the delivery
size companies
Accounts
successfully.
having regular
Receivables
Revolving
Major Short
Features Term
are
Facility, supplies to corporate
Permanent Assignment of Payment, Financing
against
invoices,
bodies
Post-
delivery Financing Work Order
Finance against the assignment of bill
Medium and large
Financing
arising out of work orders on a
clients with
revolving basis. The company shall
continuous flow of
take
assignment
of
suitable
work
orders and / or invoices and finance
work orders from customers
the client against those. Corporate Finance
Bridge Finance
Bridge Finance is a kind of Short
Company going for
Term Finance extended in anticipation
an IPO or expecting
of immediate long term financing such
to avail a long term
as public issue, private placement,
loan or Working
loan syndication, lease syndication,
Capital within one
loan, lease & debenture.
year or so.
Syndication of
Making available a large financing for
Financing new large
Large Loans
a corporate client. Arrange syndicated
project; Financing
financing in the mode of loan, lease,
BMRE (Balancing,
equity,
working
combination
capital,
thereof.
or
any
Particularly
Modernization, Replacement and
useful for large projects requiring
Expansion);
large scale investment and no single
Refinancing a large
financier wants to take the whole risk.
project.
Example: Greenfield project. Advisory Services
Advisory services are comprehensive financial, advice
to
economic
and
companies
strategic
for
All large corporate houses
growth,
profitability, and sustainability. This includes
providing
services,
such
wide
range
of
as
corporate
counseling, project counseling, capital Merger and
restructuring, financial engineering,
Acquisition
diagnosing financial problems.
Medium and large corporate
Help find appropriate organization for best
possible
synergy,
bodies
conduct
valuation of companies and select Securitisation
suitable
merger
and
acquisition
methods, negotiate and execute deal beneficial for all the parties involved. Securitisation
is
the
issuance
of
All corporate bodies
financial
instruments
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 The
Issue
Management
group
is
Issue
capable of devising innovative solution
Management
for
raising
capital
–
debt
All corporate bodies
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.
All corporate bodies
Underwriting Underwriting refers to the guarantee by the underwriters that in the event of under-subscription, the underwriter will take up the under-subscribed amount Portfolio
on
pro-rata
basis
upon
payment of price of that option
Individuals, Professionals, &
Management
Corporate Bodies Merchant banks allow small investors to
open
investor
account
with
merchant banks and provide support for the purchase and sales of shares. Clients
shall
have
Corporate
discretionary
power
Advising
investment decisions.
absolute to
make
All corporate bodies
Through
corporate
merchant
bank
analyze
its
advising,
helps
financing
the
the issuer
needs
and
suggest various ways to raise needed funds. Securities Services Provide services for Trade Execution Brokerage
(Dhaka
and
Services
Exchanges),
Chittagong Pre
-IPO
All corporate bodies
Stock private
placement, Asset allocation advice, Opportunities for trading in different financial instruments. Individuals, CDBL Services
Apart from the brokerage services,
Professionals, &
as full service
securities services also provide the
Corporate Bodies
Depository
services like BO (Beneficial Owner)
Participant (DP)
accounts opening and maintenance, Dematerialization, Re-materialization, Transfers
and
multiple
accounts
movement, Lending and borrowing etc.
5.4 Challenging Issues for NBFIs (a) 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. (b) 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 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 (c) 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. (d) 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. (e) 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 the financing requirements of the evolving economy. With regard to deployment of funds, the total outstanding lease, loan and investment by NBFIs stood over BDT 34 billion, BDT 26 billion and BDT 3 billion respectively by the end of September, 2006. 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. (f) 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. (g) 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. (h) 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. (i) Lack of a 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 prevalent mode of finance lease in case of these recovered assets to create a demand for second hand or used machinery and equipment.
5.5 Recommended Alternatives (a) 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. (b) Competition and Product Diversification NBFIs in Bangladesh are operating in a highly competitive environment. The competition for NBFIs is even ore 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. (c) 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.
The success of merchant banking
operations is largely linked to the development of the security market. So NBFIs should concentrate more on their opportunities in the capital market. (d) 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. (e) 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.
Chapter- Six: Microfinance Institutions (MFIs) in Bangladesh The member-based Microfinance Institutions (MFIs) constitute a rapidly growing segment of the Rural Financial Market (RFM) in Bangladesh. Microcredit programs (MCP) in Bangladesh are implemented by various formal financial institutions (nationalized commercial banks and specialized banks), specialized government organizations and Non-Government Organizations (NGOs). The growth in the MFI sector, in terms of the number of MFI as well as total membership, was phenomenal during the 1990s and continues till today. Over the period of June 2003 to June 2006 the growth rate was over 70% in terms of horizontal expansion of microcredit borrower. The total coverage of MCP in Bangladesh is approximately 30.09 million borrowers without considering overlapping figures. Table-1 shows the coverage of major institutions in the formal and semi-formal sectors.
6.1 Coverage of Microcredit Program It is estimated that after considering the overlapping problem, which is expected to be over 40%, the effective coverage would be around 18.05 million borrowers. Out of 18.05 million borrowers covered by microcredit program, about 62% are below poverty line and so over 11.19 million poor borrowers are covered by microcredit program by 2008. Table - 1: Coverage of Microcredit Program
Organization NGO-MFIs (June 2008) Grameen Bank (June 2008) Government Program (December, 2008)
No. Borrowers 18,415,878 6908704 1,997,240
ofOutstanding Loan (in million Taka) 78,930.57 33235.46 7,710.05
Sub Total
27,621,573
120,493.52
Nationalized Commercial Banks (December, 2008)2311150
32783.45
Private Banks (December, 2008)
164113
1106.46
Sub Total
2,475,263
33,889.91
Grand Total
30,096,836
154,383.43
Source: Microcredit Regulatory Authority, Grameen Bank
6.2 The portfolio status of micro-financial sector in Bangladesh Microcredit programs of NGOs (known as NGO-Microfinance Institutions or NGO-MFIs) and Grameen Bank play dominant role in this financial market, NGO-MFIs serve more than 61 percent and Grameen Bank alone serves 24 percent of the total borrowers. Among NGO-MFIs more than 80 percent of the outstanding loan disbursed by the top 20 NGOs, three of them are very large and have coverage all over the country. Service charge on credit varies from 10% to 20% at flat method of collection, all partners of Palli Karma-Sahayak Foundation (PKSF) charge 12.5%. Average interest offered by NGOMFIs on savings to the members is 5%. Near about 90% of the clients of this sector are female. Loan recovery rate is generally very high compare to the banking sector, which is over 90%. Average loan size of NGO-MFIs was found around Taka 4,000. The portfolio status of micro-financial sector in Bangladesh can be represented as follows structure •Total
RLF
(Capital
base)
Tk. 27,460 million •Cumulative
Disbursement
Tk. 109,120 million •Loan
Outstanding
Tk. 20,812 million •Average Tk. 3,000 - 4,000
loan
size
•Net
Savings
Tk. 8,088 million •Total
Active
Borrowers
7,574,269 •Ave.
Repayment
Rate
95% •Interest
rate
on
loans
8 - 30%
Sector based financing provided by the Micro-financial institutions in Bangladesh
Types of Services offered by MFIs-NGOs
Savings
Credits
Term loans
Mandatory
Entrepreneurs’ loans
Voluntary
Housing loans
Flexible
Health & Sanitary loans
Daily
Seasonal loans
Time Deposit
Disaster loans
Insurance Health insurance Life insurance Credit insurance Property insurance
Business planning & management
Training/Consulting
Entrepreneurship Development Basic Accounting & Cash Management Product diversification Innovation
Marketing outlay
Marketing
Production centre Promotional activities Infrastructure support
Group formation Awareness rising Leadership Development
Institution building
Linking/Networking
Strength of Micro-finance sector in Bangladesh •
Social recognition of NGO- MFIs contribution
•
Serving the poor, specially the women
•
Development of a ‘credit culture’
•
Commitment for impact and sustainability
•
Scale, experience and efficiency
•
Diversification of income opportunities
•
Research & knowledge generation
Weakness of Micro-finance sector in Bangladesh •
Limited sources of RLF
•
Weak financial management systems
•
Restricted pool of experience MF Staff
•
Subsidy mentality of NGO-MFI leaders
•
Low skills levels and illiteracy of poor
•
Weak coordination amongst NGO-MFIs
•
High client transaction costs
Current Issues of Micro-finance sector in Bangladesh o Regulatory status of MF-NGOs o Protection of members’ savings o MFI management & systems o Weak governance structures o Sources of capital o Overlapping and duplication o Sustainability versus impact – multiple objectives o Lack of diversity - focus on Grameen Model o Absence of performance standards o Urbanization o Response to natural disasters o Impact maximization for the poorest o Need for innovation Challenges of Micro-finance sector in Bangladesh
•
Reaching poorest of the poor – mismatch between ‘micro-success’ and ‘macro-failure’
•
Develop new and better financial products and services
•
Improve MFI management and systems
•
Resolve regulatory issues
•
Credit Rating - greater co-operation
•
Serving the urban poor
•
Offsetting impact of disaster
•
Threat of oligopoly
Impact on household living on below poverty line • Increased income, employment and asset formation • Increase in skills base and production activities • Diversification of livelihood strategies, reduction in vulnerability • Reduced dependency on informal money market / money lender • Increased participation of women in HH decision making and better understanding of their rights • Reduced men’s violence against women • Increase of ‘social capital’ • Improvement in HH nutrition, sanitation and education • Better practices of health and family planning Some negative impact of Micro-finance sector in Bangladesh •
Increased burden on women
•
Increased indebtedness of borrowers
•
Marginal profitability of some MEs
•
Enterprise de-capitalization
•
Social conflict
•
Saturation of traditional markets -squeezing profits
Some recommendations for MFIs in Bangladesh o Flexible savings and credit o Shift towards ‘Enterprise loans’
o Micro-insurance o Linking MFIs with formal financial markets o Private sector involvement o Individual financial products
6.3 Microcredit Regulatory Authority Microfinance is now a nation-wide activity in Bangladesh. The issue of a regulatory framework has come to the forefront because NGO-MFIs, the major provider of this service, are providing financial services to the poor outside the formal banking system. The government of Bangladesh enacted 'Microcredit Regulatory Authority Act 2006' (act number 32 of the year 2006) on July 16, 2006 with effect from August 27, 2006 with a view to ensuring transparency and accountability of microcredit activities of the Microfinance Institutions (MFIs) in the country. Microcredit Regulatory Authority (MRA) has been established under the act which is now empowered and responsible to implement the said act and to bring the microcredit sector of the country under a fullfledged regulatory framework. According to the Act, no MFI can carry out microcredit activities without obtaining licence from MRA. Section 15(2) of 'Microcredit Regulatory Authority Act 2006' has made it mandatory for MFIs who had microcredit activities before the effective date (August 27, 2006) of the act to apply for license to MRA within six months (February 26, 2007) from the effective date of the act. Accordingly 4236 NGO-MFIs have applied to MRA for license by February 26, 2007. It was decided by the Authority that among these organizations, only those organizations will be considered for license that can fulfill minimum criteria (have equal to or more than 1000 borrowers or equal to or more than taka 40 lakhs loan outstanding). Rest of the organizations already applied to the Authority will be allowed time till June 2009 to reach the above mentioned minimum criteria. If they are unable to meet those criteria within specified time they will have to close their microcredit operation after that given time. Accordingly applications from 705 institutions are being considered for license. After evaluating their application and real operations at field level they are being
considered finally as eligible to get license. Upto May 20, 2008 the authority has issued 250 licence to different NGO-MFIs and licensing procedure of other selected NGO-MFIs are under process. MRA is also working to prepare details rules and policies to monitor and supervise licensed NGO-MFIs that will cover governance issues, financial transparency, mode of operations and other related issues to ensure transparency and accountability in operation.
Chapter- Seven: - Capital Market in Bangladesh Bangladesh capital market is one of the smallest in Asia but the third largest in the south Asia region. It has two full fledged automated stock exchanges namely Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) and an over-the counter exchange operated by CSE. It also consists of a dedicated regulator, the Securities and Exchange Commission (SEC), since, it implements rules and regulations, monitors the triplications to operate and develop the capital market. It consists of Central Depository Bangladesh Limited (CDBL), the only Central Depository in Bangladesh that provides facilities for the settlement of transactions of dematerialized securities in CSE and DSE. The Capital market, an important ingredient of the financial system, plays a significant role in the economy of the country.
7.1 Regulatory Bodies The Securities and Exchange Commission exercises powers under the Securities and Exchange Commission Act 1993. It regulates institutions engaged in capital market activities. Bangladesh Bank exercises powers under the Financial Institutions Act 1993 and regulates institutions engaged in financing activities including leasing companies and venture capital companies.
Parliament of Bangladesh Ministry of Finance, Govt. of Peoples Republic of Bangladesh
Security Exchange Commission (SEC) Dhaka Stock Exchange (DSE)/ Chittagong Stock Exchange (CSE) Members/Share traders/Share Brokers of Stock Figure: Regulatory Structure Overview of Capital market in Bangladesh
7.2 Participants in the Capital Market The SEC has issued licenses to 27 institutions to act in the capital market. Of these, 19 institutions are Merchant Banker & Portfolio Manager while 7 are Issue Managers and 1(one) acts as Issue Manager and Underwriter. i) Stock Exchanges There are two stock exchanges (the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE)) which deal in the secondary capital market. DSE was established as a public Limited Company in April 1954 while CSE in April 1995. As of 30 June 2000 the total number of enlisted securities with DSE and CSE were 239 and 169 respectively. Out of 239 listed securities with the DSE, 219 were listed companies, 10 mutual funds and 10 debentures. ii) Investment Corporation of Bangladesh (ICB) The Investment Corporation of Bangladesh was established in 1976 with the objective of encouraging and broadening the base of industrial investment. ICB underwrites issues of securities, provides substantial bridge financing programmes, and maintains investment accounts, floats and manages closed-end & open-end mutual funds & closed-end unit funds to ensure supply of securities as well as generate demand for securities. ICB also operates in the DSE and CSE as dealers.
iii)
Specialized Banks
Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha (BSRS), BASIC Bank Ltd., some Foreign Banks and NCBs are engaged in long term industrial financing.
7.3 Important Institutions of Capital market in Bangladesh •
Security Exchange Commission (SEC)
•
Dhaka Stock Exchange (DSE)
•
Chittagong Stock Exchange (CSE)
7.3.1 The Securities and Exchange Commission (SEC) The Securities and Exchange Commission (SEC) was established on 8th June, 1993 under the Securities and Exchange Commission Act, 1993. The Chairman and Members of the Commission are appointed by the government and have overall responsibility to administer securities legislation. The Commission is a statutory body and attached to the Ministry of Finance. Members perform the following functions: •
Serve as the members of the Commission and supervise its management.
•
Provide policy direction to industry and staff and promulgate legally binding rules.
•
Act as an administrative tribunal for decisions on the capital market.
Mission of the SEC is to: •
Protect the interests of securities investors.
•
Develop and maintain fair, transparent and efficient securities markets.
•
Ensure proper issuance of securities and compliance with securities laws.
The Commission's main functions are: •
Regulating the business of the Stock Exchanges or any other securities market.
•
Registering and regulating the business of stock-brokers, sub-brokers, share transfer agents, merchant bankers and managers of
issues, trustee of trust
deeds, registrar of an issue, underwriters, portfolio managers, investment advisers and other intermediaries in the securities market. •
Registering, monitoring and regulating of collective investment scheme including all forms of mutual funds.
•
Monitoring and regulating all authorized self regulatory organizations in the securities market.
•
Prohibiting fraudulent and unfair trade practices relating to securities trading in any securities market.
•
Promoting investors’ education and providing training for intermediaries of the securities market.
•
Prohibiting insider trading in securities.
•
Regulating the substantial acquisition of shares and take-over of companies.
•
Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of securities, the Stock Exchanges and intermediaries and any self regulatory organization in the securities market.
•
Conducting research and publishing information.
From the above functions it is clear that, Security Exchange Commission (SEC) established in order to protect the interest of general shareholders of the capital market. It can be mentioned that this commission is empowered to control the capital market through “Security and Exchange Act. 1993” 7.3.2 Introduction to Dhaka Stock Exchange (DSE) The Necessity Of Establishing A Stock Exchange In The Then East Pakistan Was First Decided By The Government When, Early In 1952.It Was Learnt That The Calcutta Stock Exchange Had Prohibited The Transactions In Pakistani Shares And Securities. The Provincial Industrial Advisory Council Soon Thereafter Set Up An Organizing Committee For The Formation Of A Stock Exchange In East Pakistan. A Decisive Step Was Taken The Second Meeting Of The Organizing Committee Held On The 13th March, 1953. In The Cabinet Room, Eden Building, Under The Chairmanship Of Mr. A. Khaleeli, Secretary Government Of East Bengal, Commerce, Labor And Industries Department At Which Various Aspects Of The Issue Were Discussed In Detail. The Then
Central Governments Proposal Regarding the Karachi Stock Exchange Opening A Branch At Dhaka. , Did Not Find Favour With The Meeting Who Felt That East Pakistan Should Have An Independent Stock Exchange. It Was Suggested That Dhaka Narayanganj Chamber Of Commerce & Industry Should Approach Its Members For Parchase Of Membership Cards At RS.2000 Each For The Proposed Stock Exchange. The Location Of The Exchange It Was Thought Should Be Either Dhaka Narayanganj Or Chittagong.
An
Organizing
Committee
Was
Appointed
Consisting
Of
Leading
Commercial And Industrial Personalities Of The Province With Mr. Mehdi Ispahani As The Convener In Order To Organize The Exchange. It Was Also Decided That Membership Fee Was To Be Rs.2000 And Subscription Rate At 15 Per Month. The Exchange Was To Consist Of Not More Than 150 Members. A Meeting Of The Promoters Was Held At The Chamber On 03.09.1953 When It Was Decided To Appoint Orr Dignam & Co., Solicitors To Draw Up The Memorandum And Articles Of Association Of The Stock Exchange Based On The Rules Of Stock Exchange Existing In Other Countries And Taking Into Account Local Conditions. The 8 Promoters Incorporated The Formation As The East Pakistan Stock Exchange Association Ltd. On 28.04.1954. As Public Company. On 23.06.1962 The Name Aws Revised To East Pakistan Stock Exchange Ltd. Again On 14.05.1964 The Name Of East Pakistan Stock Exchange Limited Was Changed To "Dhaka Stock Exchange Ltd." At The Time Of Incorporation The Authorized Capital Of The Exchange Was Rs. 300000 Divided Into 150 Shares. Of Rs. 2000 each and by an extra ordinary general meeting adopted at the extra ordinary general meeting held on 22.02.1964 the authorized capital of the exchange was increased to Tk. 500000 divided into 250 shares of Tk. 2000 each. The paid up capital of the exchange now stoods at Tk.460000 dividend into 230 shares of Tk. 2000 each. However 35 shares out of 230 shares were issued at TK. 80, 00,000 only per share of TK. 2000 with a premium of TK. 79, 98,000. Although incorporated in 1954, the formal trading was started in 1956 at Narayanganj after obtaining the certificates of commencement of business. But in 1958 it was shifted to Dhaka and started functioning at the Narayangonj chamber building in Motijheel C/A.
On 1.10.1957 the stock exchange purchase a land measuring 8.75 Kattah at 9F Motijheel C/A from the Government and shifted the stock Exchange to its own location in 1959. Legal Control The Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activities are regulated by its Articles of Association rules & regulations and bye-laws along with the Securities and Exchange Ordinance, 1969, Companies Act 1994 & Securities & Exchange Commission Act, 1993. Function of DSE The major functions are: Listing of Companies.(As per Listing Regulations). Providing the screen based automated trading of listed Securities. Settlement of trading.(As per Settlement of Transaction Regulations) Gifting of share / granting approval to the transaction/transfer of share outside the trading system
of the exchange (As per Listing Regulations 42)
Market Administration & Control. Market Surveillance. Publication of Monthly Review. Monitoring the activities of listed companies. (As per Listing Regulations). Investor’s grievance Cell (Disposal of complaint bye laws 1997). Investors Protection Fund (As per investor protection fund Regulations 1999) Announcement of Price sensitive or other information about listed companies through online. Current Market Status of Dhaka Stock Exchange (DSE) The current market statuses of DSE are shown by the following figures and tables. Figure-1: Industry wise no of companies listed in DSE
Highest Records Values Total Number of Trades Total Trade Volume Total Traded Value in Taka(mn) Total Market Capital in Taka(mn)
Date
142629 15-03-2009 46173445 12-10-2008 6525.158 04-05-2009 1061685.783 20-04-2009
DSI Index
2716.00912 01-06-2008
DSE General Index
3207.89499 01-06-2008
Index Graph of Last 1 Year from 21-05-2008 to 2009-05-21 Highest value: 2716.00912 Lowest value: 2001.8798
Index Graph of Last 1 Year from 21-05-2008 to 2009-05-21 •
Highest value: 3207.8949
•
Lowest value: 2408.67157
Index Graph of Last 1 Year from 21-05-2008 to 2009-05-21 Highest value: 2666.76069 Lowest value: 1841.74494
Performance of DSE at a glance
Years
2007
2004
2005
2006
No. of Securities
256
286
310
350
% of Annual Growth
(4.12)
11.72
8.39
12.9
No. of Securities in mn
1,188.53
1244.14
1546.05
2081.00
% of Annual Growth
3.21
4.68
24.27
21.83
-Tk. mn
49,532.91
70,313.00
118437
214472
-US$ mn
832.49
1,062.77
1711.52
3127.33
% of Annual Growth
7.55
41.95
68.44
81.09
-Tk. mn
224,923.00
233,075.12
323367.94
742195.87
-US$ mn
3,761.25
3,522.90
4672.95
10822.34
% of Annual Growth
130.83
3.62
38.74
135.28
Conversion Rate
59.8
66.16
69.2
68.58
Volume in mn
681.38
883.3
797.77
2831.23
Value (Tk. mn)
53,181.71
64,835.28
65079.11
322867.07
Value (US$ mn)
902.92
979.98
1099.3
4707.89
% of Annual Growth
177.68
21.91
0.38
396.11
Volume in mn
2.55
3.42
3.5
1362.31
Value (Tk. mn)
198.44
251.38
285.43
19.86
Value (, US$ mn). % of Annual Growth
3.32
3.8
4.82
19.86
196.33
26.64
13.58
377.28
3
17
7
14
~Tk. mn
473.88
1265.7
1433.95
4638.13
-US$ mn
8.1
19.13
24.22
67.63
% of Annual Growth
(64.93)
167.09
13.29
223.45
-Tk. mn
20.00
145.90
146.72
1540.00
-US$ mn
0.34
2.21
2.47
22.46
Listed Issues
Issued Capital & Debentures
Market Capitalization
Turnover of Listed Securities Total Turnover
Daily Average Transaction
Initial Public Offcring(IPO) NO. of Public Issues Size of Public Offer
Size of Pre IPO Placement
DSE Performance from April 2004 to March 2009
The Yearly Index Movement (April 2008 to March 2009)
The Performance of DSE comparing to the Global Capital Market
Indice Indice
Name of the
Indices
Capital
Name
Markets
s Year
s
Listed
endin Curren Compani g
t Jan
2007
2008
es
Market Turnove PE Cap. in r in US$ Ratio US$ mn
mn
2007
2007
Yield %
(200 (200 7)
7)
% of GDP 2007
SAARC Countries: Colombo Stock Exchange Dhaka Stock Exchange
CSE Milanka DSE GEN
2540.9 2446.1 9
3
3017.2 2907.1 1
7
14077. 14016.
Karachi
KSE 100
Bombay
SENSEX 20287 17648.
Stock
2
9 7
235
269
654 4887
7553.2
10822.3 4 68794.2 5
952.2 10.97 2.67 24.32
4707.89 23.58 2.08 15.87
350
-
-
47.85
181910 347681. 24.86 0.97 166.9 1
8
Exchange Regional: PSE Philipines
Composi 3621.6 3266
244
te Kualalamp ur Singapore
KLSE Composi te
1445.0 1393.2 3
STI
3482.3
SET
-
5 2981.7 5
986
762
Stock Exchange
-
523
of Thailand
102852. 7 325290. 3
29251.8
-
-
72.92
169405
-
-
197.17
-
-
351.28
-
-
87.3
2138699
-
-
6475765
-
-
99.65
-
-
139.76
-
-
144.42
-
-
64.59
539176. 381622. 6
3
197129. 118259. 4
7
International: Hongkong Japan London
Hang Seng TOPIX FTSE 100
United States
S&P 500
(Combind) Germany
DAX
27812. 23455. 7
7
1475.6 1346.3 8
1
6456.9 5879.8 1468.3 1378.5 6
5
8067.3 6851.7 2
5
1241 2414 3307
5941
866
265441 6 433092 2
385170 1032433 6
5
199222 4520029 80 210519 8
6 4323675
1307.8 5
Source: World Federation of Exchanges, Individual Stock Exchange Website, www.econstats.com.
7.3.3 Introduction to the Chittagong Stock Exchange (CSE)
The Chittagong Stock Exchange (CSE) began its journey in 10th October of 1995 from Chittagong City through the cry-out trading system with the promise to create a stateof-the art bourse in the country. Founder members of the proposed Chittagong Stock Exchange approached the Bangladesh Government in January 1995 and obtained the permission of the Securities and Exchange Commission on February 12, 1995 for establishing the country's second stock exchange. The Exchange comprised of twelve Board members, presided by Mr. Amir Khosru Mahmud Chowdhury (MP) and run by an independent secretariat from the very first day of its inception. CSE was formally opened by then Humble Prime Minister of Bangladesh on November 4, 1995. Mission The Chittagong Stock Exchange believes that a dynamic, automated, transparent stock exchange is needed in Bangladesh. It works towards an effective, efficient and transparent market of international standard to serve and invest in Bangladesh in order to facilitate the competent entrepreneurs to raise capital and accelerate industrial growth for overall benefit of the economy and keep pace with the global advancements. Objectives •
Develop a strong platform for entrepreneurs raising capital;
•
Provide a fully automated trading system with most modern amenities to ensure: quick, easy, accurate transactions and easily accessible to all;
•
Undertake any business relating to the Stock Exchange, such as a clearing house, securities depository center or similar activities;
•
Develop a professional service culture through mandatory corporate membership;
•
Provide an investment opportunity for small and large investors;
•
Attract non-resident Bangladeshis to invest in Bangladesh stock market;
•
Collect preserve and disseminate data and information on stock exchange;
•
Develop a research cell for analyzing status of the market and economy.
Millstones of CSE 12th February 1995
Bangladesh Government approved CSE
1st April 1995 10th October 1995 1st January 1996
Incorporated as a limited company Floor Trading started Became corresponding member of World Federation of Exchanges (Former
2nd June 1998 1999 16th January 2000 26th January 2004 30th May 2004 4th July 2004
FIVB) First bourse to automate the nationwide trading system Established CSE Investor Protection Fund Convened SAFE Sponsored Central Depository Bangladesh Ltd. (CDBL) Internet Trading Service opened Over- the-Counter market opened
Legal Basis of CSE As legal entity CSE is a not-for-profit public limited company. All of its 129 members are corporate bodies. It has a separate secretariat independent of policymaking Board. The Board comprises of brokers and non-brokers directors with equal proportion to ensure the transparency. The Board constituted Committees to delegate such functions and authority as it may deem fit. There is an independent secretariat headed by a full time Chief Executive Officer. CSE activities are regulated by its own regulations and bye laws along with the rules, orders and notification of the SEC.
Five years index and market summary
Annual Turnover (Mn. Tk.) Market Days Daily Average Turnover (Mn
2001 14,953 268 55.79
Tk.) Securities Traded
593,754,4 586,846,6 203,731,0 332,534,6 310,319,5
Trades (No.) Number of new Listings Securities Listed Market Capital (Mn. Tk.) CSE All Share Price Index CSE-30 Index No. of Companies Declared
10 839,123 12 177 56,364 1352.39 1240.05 112
Dividend No. of Companies Issued Bonus 7
2002 2003 13,580.84 6,719.40 287 286 47.33 23.49
2004 2005 14,807.40 14,045.12 271 263 54.64 53.39
83 691,001 10 185 60,468 1415.92 1232.40 133
08 258,686 11 196 85,312 1642.79 1515.93 131
11 550,729 9 198 215,011 3597.70 3463.76 135
42 669,991 14 210 219,942 3378.67 3159.54 118
16
16
39
52
Shares Figure: Five years comparisons of Annual Turnover and Market Capital
Figure: Five years comparisons of CSE all share index and CSE-30 index
7.4 Prevailing Rules and Regulations of Bangladesh capital Market The prevailing rules and regulations of Bangladesh capital market are as follows; 1. Companies Act. 1994 2. Security and Exchange Act. 1969 The important aspects of this act are as follows •
Stock exchange activities can be performed only by listing to the stock exchange
•
Govt. or SEC can restrict the stock exchange any time to protect the interest of the investors,
•
Only securities issued by listed companies can be traded
•
Govt. is empowered to listing any corporation under certain terms and conditions
•
Any types of misrepresentation of stock will not be allowed
3. Capital Issues Act. The important aspects of this act are as follows •
Every company must have to take permission from respective ministry before starting share or security trading
•
At least 50% of Public Limited Company capital must be issued to general investor and ICB
•
No discriminations among the same group of investor will not be allowed
•
There are some specific instruction include this act regarding the issuance of right and bonus share
•
It allowed the issuance of shares at a premium rate
4. Security and Exchange Rules 1987
This rule is basically related with the auditing of financial statements by accounting firms. The auditor must have certified that the financial statements are prepared as per the requirement of 1987 Security and Exchange Rules.
7.5 Prospects of Capital Market in Bangladesh Our emerging economy mostly invited the funds from all over the globe. Market capital has shown amazing growth. Although current market price earning ratio is higher than that of the neighboring country but it is my belief that considering the demand for lack of avenue to invest, the capital market of our country has a bright and attractive future and untapped sector. Emerging economy of Bangladesh: As we know, our economy is an emerging one; there is ample scope of growth of our capital market. Our market cap, accounts for a lower share of our GDP in a comparative regional perspective. With the help of upcoming issues (IPO) we are very optimistic that the market capitalization is reach a higher level within a short span of time. Automation and introduction of Central Depository: Automation and introduction of Central Depository helped our capital market to grow considerably. The continuous endeavor of the SEC: The regulatory body, namely Securities and Exchange Commission, is continuously facilitating our capital market with its international standard surveillance and monitoring. The continuous endeavor of the SEC has resulted in our capital market to be free from fraudulent and manipulative activities. Thus presence of the SEC has impacted significantly in the development of the market. Absence of capital gain tax: Absence of capital gain tax is the most attractive reason for foreign investors (FI) to invest in Bangladesh capital market, which is not very common in emerging economies such as Bangladesh. In addition to high return and significant dividend yield, FIs should be attracted to our capital market because of the easy and hassle free repatriation of funds.
Room for new products: From the present point of time the future seems bright, not only because of our vibrant capital market but also of our room for new products. Introduction of direct listing and possible book building method: With the introduction of direct listing and possible book building method, our primary market is improving in line with the secondary market. The market cap will grow significantly within next few years and turnover shall reach an international level. Moreover, institutional clients, namely banks are entering the market with their huge liquid fund causing the capital market to grow very rapidly. Domestic and international banks have started not only to invest in the capital market but also to operate brokerage and merchant banking wing. Cross border trading and index trading are ideas we might adopt in future, which will result in liquidity and new avenues for investment and minimize our cash market risk.
7.6 Problems Involved in the capital market of Bangladesh Addressing the issue regarding our capital market, 'liquidity' and lack of "instrument" would top the list of challenges that we have right now. The major reason for the existence of the stock market is to provide liquidity of shares and diversified instruments which helps increase market capitalization. It also helps investors to gain more confidence and positively impact Gross Domestic Product (GDP) of our country. Neighboring countries such as India and Pakistan have market capitalization of more than 75% of their GDP. Comparatively, the Bangladesh capital market accounts for a far lesser share of its GDP indicating ample scope for future intensification in this sector. Hence, we should address the above to issues with utmost seriousness and with a future vision. The unexpected rise and fall in share prices mostly followed from the general confidence of the investors about political stability, euphoria of investment in shares, prospect of quick capital gains, a vacuum in respect of institutional presence in the capital market, monopolistic dominance of member brokers, inefficiency of the SEC to cape with the developments, existence to kerb market absence of proper application of circuit breaker
etc. Delivery Versus Payment mechanism was used as one of the main vehicles of manipulation. Kerb market gave birth fake and forged share certificates. • Price manipulation: It has been observed that the share value of some profitable companies has been increased fictitiously some times that hampers the smooth operation of stock exchanges. • Delays in settlement: Financing procedures and delivery of securities sometimes take an unusual long time for which the money is blocked for nothing. • Regulations in dividends: Some companies do not hold Annul General Meeting (AGM) and eventually declare dividends that confused the shareholders about the financial positions of the company. • Selection of membership: Some members being the directors of listed companies of DSE look for their own interest using the internal information of share market. • Improper financial statement: Many companies of stock exchange do not focus real position of the company as some audit firms involve in corruption while preparing financial statements. As a result the shareholders as well as investors do not have any idea about position of that company. • The concept of centralization of the securities market has not been implemented that creates technical problems and political infighting. • As the Bangladesh capital market is small market, the spread/cost ratio is relatively higher which a more important factor is for capitalization181. • The intrinsic value [12] for the securities traded in DSE are sometimes estimated without considering the current market prices of the securities. • The absence of comprehensive legal and supervisory framework. • Lack of skilled manpower in the stock exchanges as well as financial and nonfinancial institutions involved in the securities market. • The lack of proper policy framework that provides incentives and protection to investors. • The dominance of bigger public sector and borrowing of public sector as well as government from the institutional sources rater than the market.
7.7 Suggestions to Improve the Activities of Capital market in Bangladesh As it is a market that involves both the sponsors and investors, the need for a healthy and stable market became necessary. Through various forms of reforms and automation the capital market of Bangladesh won the confidence of investors from all walks of life. It is a fact that capital market outperformed money market by far in the last couple of years but that was only possible due to the uniform and state of the are technology that has been used as the platform of our capital market. In addition to that, the government facilitated our capital market by structuring its monetary and fiscal policies in a pro-capital market manner. The authorities take unusually long time to decide to allow the stuck-up shares to be free from the application of circuit breaker temporarily in the stock exchanges floor. As a result, all share price index of stock exchanges did not reflect the actual position. To improve the market activities stock exchanges is to take some measures as under. •
To introduce automated monitoring system that may control price manipulation, malpractices and inside trading.
•
To introduce full computerized system for settlement of transactions.
•
To force the listed companies to publish their annual reports with actual and proper information that can ensure the interests of investors.
•
Person being the director of listed company should not be allowed to be a member of stock exchanges.
•
To force the listed companies to declare and pay regular dividends through conducting Annual General Meeting.
•
To control and abolish kerb market from the premises of the two stock exchanges.
•
To take remedial action against the issues of fake certificates.
•
The Composite Quotation System (CQS) should be introduced and implemented that available the exchange specialists' bid-ask quotes to the subscribers.
•
To establish Central Depository System (CDS) to curb the scope of manipulation by the brokers.
•
To make arrangement to set-up merchant banks, investment banks and flotation of more mutual funds particularly in the private sectors.
•
Banks, insurance companies and other financial institutions should be encouraged deal in share business directly.
•
The brokers should not be allowed to deal in the Scripps on their own accounts; there should be complete transparency in their transactions with the clients so that one is favored as against the other.
•
There should be a system to penalize defaults to fulfill contacts regulating share dealings Charted
•
Accounts' Firms should be allowed to certify the accounts.
•
The management of stock exchanges should be vested with professionals and should not in any way be linked with the ownership of stock exchange and other firms.
•
To publicize and educate the investors about fundamentals to deal in share transactions.
•
To punish the member brokers for breaching of contract.
The above suggestions are recommended as major to improve the overall performance of DSE to play an important role in the securities market development in Bangladesh.
Chapter Eight: - Conclusion The financial sector is critical for sustained economic development and poverty reduction. This paper has argued that beyond macroeconomic stability and an effective and reliable contractual and informational framework, the role of government has to be redefined to make Bangladesh’s financial system more efficient and growth enhancing. Specifically, the government should move from the role of an operator and arbiter in the financial system to the role of enabling and creating markets. It is often argued that the financial sector suffers from the general governance problems in the economy and the society at large. However, it could be as well argued that financial sector reform should be in the center of governance reform, since it is here that the money and thus the temptation is. 30 A proper and transparent divestiture process of the NCBs and the de-politicization of financial sector regulation and
supervision can send an important signal to the rest of the economy and society and be an important catalyst for governance reforms in other areas. As mentioned above, it can be a catalyst for the redefinition of government’s role in the real economy, as the NCB divestiture process has to be linked to the SOE resolution. Banks that are effective in monitoring and disciplining their borrowers can serve as catalyst for corporate governance reform in the non-financial sector (Sobhan and Werner, 2003). An autonomous and accountable Bangladesh Bank can be an example for institutional reform of other government entities in the country. Finally, moving from a politicized and interventionist supervision process to a market-based process can help move the economy from a purely relationship-based economy to an arms-length economy. While Bangladesh has achieved relatively high economic growth over the past years with a distorted financial system and in spite of its governance problems, cross-country experience has shown the importance of financial and institutional development to sustain long-term economic growth. Now would be therefore the right moment to address this agenda. Banks and Non-Bank Financial Institutions are both key elements of a sound and stable financial system. Banks usually dominate the financial system in most countries because businesses, households and the public sector all rely on the banking system for a wide range of financial products to meet their financial needs. However, by providing additional and alternative financial services, NBFIs have already gained considerable popularity both in developed and developing countries. In one hand these institutions help to facilitate longterm 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 mitigated 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.
Chapter Nine: - Recommendations An effective financial system is the most important aspect for the economic development and sustainability of a country. A smooth flow of fund and the efficient utilization of those funds will help to ensure the required level of development in both social and economic perspective. But it is not a easy task, a long term comprehensive plan as well as a collective effort from various group of people is required to achieve that level of development in the financial system of Bangladesh. The following recommendations can be considered to gain the expected level of development. •
The growth of an efficient services sector is essential for the overall growth of the economy. An efficient financial services sector is crucial for raising the competitiveness of the countries. For this reason, appropriate government policies and measures need to be designed for a sustained growth of the services sector.
•
Bangladesh needs to enhance the education and skill level of its workforce as it is important for the financial service firms to employ skilled workforce for delivery of their services to foreign clients or attract firms to employ skilled workforce foreign multinationals into the country.
•
Computer literacy level along with the general education level needs to be enhanced to boost Mode1 export.
•
In sectors in which regulatory bodies exist, e.g., Securities and Exchange Commission (SEC) etc. there is the need to strengthen the capabilities of these institutions in order to transform them into effective regulators who are responsive to the modern needs of the financial services sector.
•
Special emphasis needs to be given to introduce E-governance to improve transparency and reduce transaction costs. E-governance can also counter the menace of corruption that is all pervasive in the Bangladesh society.
•
Regulatory institutions in collaboration with associations for different services sectors should make efforts for standardization, recognition and accreditation of service institutions, facilities and professional qualifications with international standards, qualifications and bodies.
•
Improvements in law and order situation and political stability are vital in attracting foreign investment. Bangladesh should improve its country image abroad by having political stability, adopting sound macroeconomic policies, clamping down on extremism and militancy, and improving the law and order situation.
•
Bangladesh's commitments to GATS are very limited but in practice most of the country's services sectors have been liberalized as part of its general economic reform programme.
•
Bangladesh Bureau of Statistics (BBS) needs to improve statistical coverage of the financial services sector. Inclusion of more reliable data on financial service sector would increase awareness among foreign investors.
•
Government should take initiatives to start short training programme on GATS for all stakeholders on a regular basis. The resource person can be drawn from the Ministry of Commerce, universities, and research organizations of the country as well as from the professional staff of the WTO, ITC and UNCTAD.
•
Attracting FDI: Bangladesh badly needs FDI. More emphasis needs to be given to attract FDI to financial services. The country may benefit from "commercial presence" in these services by way of improvements in quality and supply. Commercial presence should be welcome in banking services as it will bring better technology and best practices, which will improve the efficiency in the sector.
•
Promoting Growth of Banking: Since Bangladesh doesn’t have enough resources for development, foreign banks should be encouraged to open branches and bring new capital investment.
•
The high lending rates and high interest rate spreads symptomatic of an oligopolistic banking structure needs to be rationalized through prudent intervention of Bangladesh bank.
•
There should be a sound regulatory regime with greater operational autonomy of the central bank.
•
Further liberalization doesn’t appear necessary for the insurance subsector. Stakeholders do not consider any foreign participation desirable either. The presence of large number of insurance companies in a small market has created problems in the smooth functioning of the insurance industry. Merger of some of the companies could be a solution, which would get rid of unnecessary competition and also enable the advantages of economies of scale.
•
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. Active participation of merchant banks
is essential to accelerate the capital market activities which can expedite the economic growth of the country. •
There is the need for effective monitoring and surveillance on insurance companies. The regulatory agency of the insurance industry, the CCI, is not equipped with adequate manpower and resources to supervise this growing industry. The efforts of CCI should also be equipped with proper logistical support, such as computer facilities, internet communication etc., which will enhance the efficiency of its day to day work.
•
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 securitization of assets.
•
On undertaking liberalization commitments under GATS, the banking sector of Bangladesh has already been liberalized unilaterally. Bangladesh may formally schedule its commitments to WTO with certain limitations regarding mode 3 and 4, and claim credit in the ongoing Doha Round negotiations.
•
There is no need to open up the insurance sector to foreign competition at the present stage on liberalization commitments under GATS.
•
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. 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.
•
Financial policy and poverty reduction in Bangladesh: The direct effects of financial sector policies on poverty can be mediated through different ways, such as cost and other conditions for access to credit, level and pattern of private investment, and means of financing fiscal deficits. Several financial policies in Bangladesh are likely to contribute positively to poverty reduction through their efforts of directing adequate credit to structurally disadvantaged sectors like agriculture, SMEs, and the rural nonfarm sector. The Bangladesh Bank has encouraged the commercial banks, especially the private ones, to provide credit to agriculture and other pro-poor sectors.
References
•
Dhaka University Journal of Business Studies, Volume XXIV, No.1 June 2003
•
The Bangladesh Accountant Journal, Vol. 60 No. 32 October-December 2008
•
An analytical insight on Banking Sector performance in Bangladesh by Md. Hafizul Islam, IST Journal on Business and Technology, Volume-1, No. 1, December 2008.
•
Journal of Institutes of Bankers, Bangladesh, Volume 52, No. 1, June 2005
•
Journal of Peoples University Bangladesh, Volume 2, No. 2 July 2005
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Non-Bank Financial Institutions in Bangladesh: An Analytical Review by Md. Nehal Ahmed and Mainul Islam Chowdhury
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CAPITAL MARKET IN BANGLADESH-TRENDS AND PRACTICES by AMALENDU MUKHERJEE & MD.GHULAM FARUQUE
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Non-Bank Financial Institutions: Lacking the policy Support, Business Bangladesh
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Keys for the Development of Financial Service Sector of Bangladesh: Particularly looking at the Ongoing Negotiations on the GATS Financial Services Agreement (FSA) and its effect on the financial sectors of Bangladesh by M. Emrul Hasan, Institution: North South University, Dhaka, Bangladesh.
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Business Finance, By Prof. M. Shahjahan Mina, Third Edition, Azazia Book Dipo
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An Investigation on the Problems and Prospects of Lease Financing in Bangladesh. By Fazle Elahi Mohammad Faisal, Khan Jahirul Islam and Mosaddek Ahmed Chowdhury
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An Analysis of Risk Management with Special Reference to Insurance by Dr. Simmi Agrawal and Dr.Muhammad Mahboob Ali
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An Insight into the Economic Impact of Micro Credit At The Household Level: What Does the Reality Say? Khan Jahirul Islam, Shameem Ahmed and Margia Binte Siddiqi