Financial Sectors in Bangladesh & Contribution of Leasing Sector
Objective of the Report: The prime objective of the report is to get practical knowledge about the overview of our financial sectors. Besides the prime objective; the report has been composed to obtain the following specific objectives: • To present an over view of economy of Bangladesh. • To know an overview of financial sectors in Bangladesh and development of financial sector. • To know which industry contributes highest portion to the financial sectors in Bangladesh. • To know an overview of leasing sector in Bangladesh. • To assess the impact of leasing sectors on our economic growth. • To identify the problems of leasing sectors in our country. Limitations of the Study: In preparing the report, some problem is found, affected the presentation of the report. The acute problems area) Lack of information or data: The information related to different issues for the leasing sector is not properly available. As a result in the report there is a data limitation. Specially, the information concerning our country is tough to get. b) Time constraint:
It is something like impossible to cover in depth of the report within the short time period. In spite of all the drawbacks faced, everything has been managed well at the end. That’s why it can be thought; the report is a quality report on the financial sectors in Bangladesh and impact of leasing sector on our economy. So readers are requested to consider these limitations while reading and justifying any part of study.
Methodology & Sources of Data:
To prepare the report the following are the important terms:
Processing of Data:
Data have been processed with the help of Microsoft excel.
Analysis of Data:
Data have been analyzed & interpreted with various tools.
Different ratios have been used to identify the performance of leasing sector and financial sector in Bangladesh.
Sources of Data:
The information for preparing the report have been collected from various sources such as internet, annual report of those leasing companies etc.
Overview of Economy of Bangladesh 2.1 Bangladesh Economy: The country's economy is based on agriculture. Rice, jute, tea, sugarcane, tobacco, and wheat are the major crops. Bangladesh is the world's largest producer of jute. Fishing is also an important economic activity, and beef, dairy products, and poultry are also produced. Except
for natural gas (found along its eastern border), limited quantities of oil (in the Bay of Bengal), coal, and Bangladesh possesses few minerals. Dhaka and Chittagong (the country's main sea port) are the principal industrial centers; clothing and cotton textiles, jute products, processed food, pharmaceuticals products, steel, and chemical fertilizers are manufactured. In addition to clothing, textiles, jute, and jute products, exports including tea, leather, fish, and shrimp. Remittances from several million Bangladeshis working abroad are the second largest source of foreign income. It has been now normal practice from few years back to present, Bangladesh Government have been sending our Defence Troops to all over the world for United Nation Peace Keeping operation mission. At present moment Bangladesh is the largest troops contributing country for United Nation Peace keeping/enforcement operation in all over the world. Our Bangladeshi Troops members are now become very renowned and highly appreciated at all levels for their honesty, sincerity and professionalism. Since the country is unable to feed itself, the most important of Bangladesh's imports are food. Capital goods, petroleum, are other major imports. Western Europe, the United States, India, and China are the main trading partners. GDP total: GDP per capita: GDP growth rate (%): Total exports: Total imports: Total FDI: Forex reserves: Currency:
$100.00 bn (at current prices 2010-11) $664 (at current prices 2010-11) 6.0 (at constant prices 2009-10) $16.20 bn (2009-10) $23.74 bn (2009-10) $0.913 bn (2010) $10.700 bn (Nov 2010) BDT (1 BDT=$0.01438) (avg 2009-10)
The economy has grown 5-6% per year since 1996 despite political instability, poor infrastructure, corruption, insufficient power supplies, and slow implementation of economic reforms. Bangladesh remains a poor, overpopulated, and inefficiently-governed nation. Although more than half of GDP is generated through the service sector, 45% of Bangladeshis are employed in the agriculture sector, with rice as the single-most-important product. Bangladesh's growth was resilient during the 2008-09 global financial crisis and recession. Garment exports, totaling $12.3 billion in FY09 and remittances from overseas Bangladeshis, totaling $11 billion in FY10, accounted for almost 25% of GDP. GDP at current price GDP data GDP (bn taka)
GNI* (bn taka)
Per capita GDP (in taka)
2008-09 6,147.9 5 6,706.9 6 42628
2010-11 (p*) 7875.00
7,589.2 8 47536
Per capita GNI (in taka) Per capita GDP (in US$)
Per capita GNI (in US$)
2.1a Economic Environment: Remains one of the worldâ€™s poorest, most densely populated, and least developed nations. Major impediments to growth include frequent cyclones and floods, the inefficiency of stateowned enterprises, a rapidly growing labour force that cannot be absorbed by agriculture, delays in exploiting energy resources (natural gas), inadequate power supplies, and slow implementation of economic reforms. Has made some headway to improve climate for foreign investors and liberalising capital markets. 2.1b Industries: Economy based on agriculture, mainly jute, rice, sugarcane, tea, tobacco, and wheat. Worldâ€™s largest producer of jute. Fishing is also important. 2.1c Infrastructure: Seaports suffer from inefficient space management and a shortage of handling equipment. Good primary road network. Extensive inland waterways. Railway system in a poor condition. Modernisation and expansion of airports planned. Inadequate electricity supply and telecommunications services. 2.2 Economic Performance: 2.2a sector wise contributions to GDP during 2009-10:
During 2009-2010, Service sectors contribute 49.90% to the GDP of Bangladesh. Industry contributes 29.95% and agriculture contributes 20.16% to the GDP of Bangladesh. 2.2b Contribution of industries to GDP during 2009-10 (m US$):
Medium-Large Industries contributes higher than that of small industries. 2.2c Investment statistics during FY 2005-2009 (US$ m):
Private sector investment increases from 2005-2006 to 2009-2010. On the other hand, public sector investment does not increase highly. So, in our country private sector investment contribute more to the economy of Bangladesh than that of public sector investment.
In our country import is always higher than export. 2.2d Bangladesh export by major products (2008-09): Among total export, Bangladesh exports highest 41.34% Knitwears. And the 38.02 percentage of total exports is woven garments. And Bangladesh also exports Frozen foods (2.92%), Leather (1.13%), Jute goods (1.73%), Chemical Products (1.80%), raw jute (0.95%), tea (0.08%) and others (12.04%).
2.2e Bangladesh export in major countries (2008-09): Bangladesh exports to 26.03% products to USA. So the highest portion of our export earning comes from USA. The second highest portion of our export revenue comes from Germany (14.58%). Bangladesh also exports to UK (9.64%), France (6.62%), Italy (3.95%), Canada
(4.24%), Spain (3.86%), Belgium (2.63%), Netherland (6.24%), Turkey (2.13%), and others (20.04%).
2.2f Comparison on economic freedom in Asia Pacific region: Name of the country Bangladesh Cambodia China India Indonesia Philippines Singapore
Business freedom (%) 59.4 39.9 49.7 36.3 53.1 48.1 98.2
Trade freedom (%) 58 70 72.2 67.9 77.9 77.8 90
Monetary freedom (%) 66.6 70.5 70.6 67.5 70.8 72.7 80.9
Investment freedom (%) 45 60 20 35 35 40 75
In terms of business freedom, the people of Singapore enjoy highest 98.20% business freedom among the Asia Pacific Region. Indonesia is 53.1%. People of Bangladesh enjoy 59.4% business freedom among Asia pacific region. In terms of trade freedom, Singapore also enjoy highest freedom and that is 90%. Bangladeshâ€™s trade freedom is only 58%. In terms of monetary freedom and investment freedom, Singapore also enjoys highest percentage. For Monetary freedom it is 80.9% and for investment freedom it is 75%. In terms of Monetary freedom Bangladesh enjoys 66.6% freedom and in terms of investment freedom it is 45%. 2.2g Economic data relating to the financial sector of Bangladesh:
Money and credit (bn* taka) Money data 2006-07 Money supply 506.50 (narrow) Money supply (broad) 2,119.86 Scheduled banks time 1,613.36 deposits
Scheduled banks time deposits increase year to years. Money supply (both in terms of narrow and broad money) also increases from 2006-2007 to 2010-2011. In the year of 2010-2011 the money supply (narrow) is 971.63 bn taka, the money supply (broad) is 4067.85 bn taka, and scheduled bank time deposits is 3096.22 bn taka. Chapter 3 Financial Sector in Bangladesh 3.1 Financial System in Bangladesh: The financial system of an economy provides the medium of exchange, allocates resources, provides a return on and affects the level of savings. It also pools, transforms and distributes risks as an important locus of implementation of development policy of a country. Real economic growth goes hand in hand with an increasing amount and diversity of activity of financial institutions, market and instruments. The financial structure is composed of two sets of elements; namely, financial instruments and financial institutions. In the context of Bangladesh, an efficient and developed financial system is essential for transferring capital from savers to investors and to channelise scarce resources to maximize production, â€œFinancial Market can be thought of as the brain of the entire economic system, the central locus of decision makingâ€?. In fact, the financial systemâ€™s contribution to growth lies precisely in its ability to increase efficiency in financial deepening through viable and effective financial market and financial instruments and profitable interaction with the progressive globalisation. 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. 3.1a Characteristics of Financial Sector in Bangladesh: Before liberation of Bangladesh, the banking and finance industries in erstwhile East Pakistan was owned and controlled by erstwhile West Pakistani owners. Bangladesh inherited a narrow and thin financial sector with six commercial banks which were nationalised, a few
foreign banks and two Govt. owned specialised financial institutions. The banking system was operating until the end of 1980s with the directives of monetary authorities aiming at achieving objectives of supplying cheap money to the State Owned Enterprises (SOEs) and priority sector like Agriculture, Export and Small and Cottage Industries in the private sector. The two important instruments at the armoury of monetary authority to execute monetary policy was selective credit control measures and administered interest rate. One consequence of Central Bankâ€™s regulated deposit and lending rates at that time without consideration of market clearing rate was that in real terms, interest rates appeared to be negative in view of high rates of inflation during the mid 70s and upto the end of 1980s. The policy of arbitrarily fixed low interest rate brought about undesirable consequences of distortion in allocation of resources between different sectors. Consequently, the financial interrelations ratio (Goldsmith, 1969) measured in terms of ratio of total financial assets to National Wealth remained abysmally low in Bangladesh ranging between 10%-20% between 1973-1983 compared to 40% - 65% in Pakistan, India, Sri Lanka, Thailand, Philippines and Malaysia (IMF Financial Statistics, 1980 - 1984). 3.1b recent developments in the financial sector: The stock market grew by 82% in 2009 compared to the year 2008, representing a total capitalisation of $275m. In order to encourage corporate houses with good fundamentals to come forward with new Initial Public Offerings (IPOs), the regulatory body introduced the â€˜book building mechanism'. In the year 2009, the Securities and Exchange Commission also asked Dhaka Stock Exchange to open Order Confirmation Transaction (OCT) market to facilitate trading of de-listed companies from the floor. Moreover, preparations are afoot to set up Bangladesh Institute of Capital Market to work for its expansion. The scheduled banks in Bangladesh will be able to get credit reports of their clients online from the Credit Information Bureau from mid 2010. BRAC bank plans to open exchange houses in Malaysia, Singapore and Italy, in order to attract more remittances through its own channel. The Asian Development Bank (ADB) has signed deals with 12 local private commercial banks for expansion of its trade finance facilitation programme in Bangladesh. Under the agreement, the banks will be able to offer more trade financing support to their clients particularly exporters and importers through international banks. The banks are Bank Asia Ltd., BASIC Bank Ltd., Dhaka Bank Ltd., Dutch Bangla Bank Ltd., Eastern Bank Ltd., Export Import Bank of Bangladesh Ltd., National Bank Ltd., Premier Bank Ltd., Prime Bank Ltd., Southeast Bank Ltd., Standard Bank Ltd., and United Commercial Bank Ltd. 3.2 The Macro Financial Environment: 3.2a Macro-financial developments: Overall, GDP growth in FY09 is likely to be around 6.0 percent and if no drastic shock affects the economy and business confidence and investment climate improve further, the
economy could grow faster. The 12-month average inflation rose to 10.06 percent in September 2008 which fell afterwards reaching 8.46 percent in January 2009. If the current trends are maintained, it is likely that the average inflation would fall to around 7.8 percent in FY09. During the first half of FY09, total revenue and total expenditure as shares of GDP stood at 5.9 percent and 8.1 percent respectively. Overall fiscal deficit as share of GDP reached 2.2 percent at the end of the first half of FY09 as against the yearly target of 4.99 percent. Public sector credit grew at 9.6 percent during H1 FY09 while the growth rate of private sector credit was 10.8 percent. Bangladeshâ€™s financial sector has shown remarkable resilience to the upholding global financial turmoil and slowing growth in high income countries, largely due to the countryâ€™s insulation from international capital markets and the negligible role of foreign portfolio investors. This resilience also derives partly from strengthened policy frameworks and macroeconomic fundamentals. 3.2b World growth outlook and economic environment: World growth is projected to fall to 0.5 percent in 2009, its lowest rate since World War II. This substantially decelerated growth is attributed to recent financial turmoil initially affecting the developed countries but gradually hurting all other major sources of global growth. The growth projections foresee an average annual real GDP growth of 3.3 percent in 2009 compared with 6.3 percent in 2008 and in developing and emerging economies, five percentage points lower than in 2007. The expectation is that world output growth would gain buoyancy by late 2009. International commodity prices have started to ease and reached comfortable levels in the backdrop of sharp fall in aggregate demand in the developed economies. Global commodity prices are projected to fall further in 2009. In the backdrop of lax demand, global inflation is projected to moderate further in 2009. 3.3 The Banking Sector: 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 the rest five are Development Financial Institutions (DFIs). 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, Samabai (Cooperative) Bank, Ansar-VDP Bank, Karmasansthan (Employment) Bank and Grameen bank are functioning in the financial sector. The number of total branches of all scheduled banks is 6,038 as of June 2000. 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. Bangladesh Bank (BB) regulates and supervises the activities of all banks. The BB is now carrying out a reform program to ensure quality services by the banks.
3.3a Short history of banking: The banking system at independence (1971) consisted of two branch offices of the former State Bank of Pakistan and 17 large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than west Pakistanis. There were 14 smaller commercial banks. Virtually all banking services were concentrated in urban areas. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it Bangladesh Bank. The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the foreign exchange reserves. The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The insurance business was also nationalized and became a source of potential investment funds. Cooperative credit systems and postal savings offices handled service to small individual and rural accounts. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. The primary function of the credit system throughout the 1970s was to finance trade and the public sector, which together absorbed 75% of total advances. The government's encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. 3.3b Interest Rate Spread: The interest rate spread (IRS) is widely used as a parameter of bank profitability, intermediation cost, and the degree of efficiency of the banking sector. The IRS shows the additional cost of borrowing that bank takes on to perform intermediation activities between borrowers and fund lenders. The market structure plays an important role in determining IRS. From a bank's perspective, IRS is a premium for the risk that the bank undertakes. Besides, it compensates for loan default, but also for the risk related to cost of funding. Banks usually borrow short term funds from depositors and invest in long term loans. Therefore, IRS for banks covers both spot and future cost of funds. It may change depending on prediction of future short term interest rate. The countryâ€™s banking structure is segmented with SCBs and PCBs holding 33.1 percent and 51.4 percent of total assets respectively. The financial system was also repressed in the 1970s and early 1980s in the presence of interest rate and credit ceilings. As part of economic reform programs, credit and other restrictions were phased out from the late 1980s. Within the structure, high IRS resulted from a number of factors
including state control of lending, absence of risk management practices, accumulation of bad loans due to political interference on commercial lending decisions, and limited technical skills particularly in the arena of risk management.
It shows the weighted average deposit (WADR) and lending (WALR) rates and the spread (IRS) of all banks from end June 2001 to end September 2008. The IRS as measured by the difference between weighted average lending and deposit rates of commercial banks, shows a generally declining trend since June 2001 except for few deviations. The spread between lending and deposits rate declined by 1.6 percentage points while deposit rates increased by 0.1 percentage points and lending rates decreased by 1.4 percentage points respectively between June 2001 to September 2008 resulting from persistent efforts of BB to encourage the banks to reduce IRS to reasonable level to facilitate investment and growth. The IRS in the banking sector of major South Asian countries shows that Sri Lanka has the highest spread followed by Pakistan, Bangladesh, and India. Table: Lending and Deposits Rates and IRS in South Asian Countries
Bangladesh India Pakistan Sri Lanka
Weighted average Lending rate 12.34 12.00-12.50 13.34 19.31
Deposit Rate 7.17 8.00-9.00 5.85 11.74
Spread 5.17 4.00-3.50 7.49 7.57
3.4 NBFI Industry in Bangladesh: Twenty-nine financial institutions are now operating in Bangladesh. Of these institutions, 1(one) is govt. owned, 15 (fifteen) are local (private) and the other 13(thirteen) are established under joint venture with foreign participation. The total amount of loan & lease of these institutions is Tk.99,091.80 million as on 31 December, 2007. Bangladesh Bank has introduced a policy for loan & lease classification and provisioning for FIs from December 2000 on half-yearly basis. To enable the financial institutions to mobilize medium and longterm resources, Government of Bangladesh (GOB) signed a project loan with IDA, and a project known as 'Financial Institutions Development Project (FIDP)' has started its operation from February 2000. Bangladesh Bank is administering the project. The project has established 'Credit, Bridge and Standby Facility (CBSF)' to implement the financing program with a cost of US$ 57.00 million. The leasing sector, a vital segment of financial sector has contributed significantly over the year, in spite of many constrains like tremendous competition with the banking sector of the country, challenges and regulatory changes (withdrawal of depreciation allowance) which are affecting adversely on the business. With the Challenges of time, the overall growth of the leasing business, achieved through diversification of products and services and aggressive marketing is indicative of the industryâ€™s contribution to our national economy. The total investment by the financial institutions (non-bank) up to June 2008 was BDT 96.8 billion which is 6.41% higher than that of previous year. They have executed leases and disbursed loan aggregating Tk.39.59 billion during 2008 which is around33% growth compared to its previous year. Capital market investment was above Tk.6 billion. The financial institutions maintained recovery level of 95% which is of an international standard Among 29 NBFIs, one is government owned, 15 are local (private) and the other 13 are established under joint venture with foreign participation. Bangladesh Bank has introduced a policy for loan and lease classification provisioning for NBFIs from December 2000 on a half yearly Basis.
3.4a Performance of NBFIs: NBFIs are increasingly coming forward to provide credit facilities for meeting the diversified demand for investment fund in the country's expanding economy. According to the available data (provisional), private sector credit by NBFIs grew at the rate of 38.7 percent and stood at Tk.108.6 billion at the end of December 2008 which was Tk.78.3 billion in December 2007 (Figure 4.4.2). The outstanding position of industrial lending by NBFIs also increased by 10.4 percent to Tk.61.4 billion at the end of December 2008 compared with Tk.55.6 billion in December 2007. However, overdue as a share of outstanding industrial loans increased to 8.0 percent in December 2008 from 6.8 percent in December 2007. This shows that the NBFIs need to streamline their loan disbursement methods with focus on low risk industrial segments and instill better monitoring mechanisms in order to reduce risks associated with their assets. Nevertheless, the contribution of NBFIs to industrial financing still remains very small.
During July-December 2008, the share of the NBFIs in total disbursed industrial loans was only 4.2 percent. More than 80 percent of the loans disbursed by NBFIs were term lending as their capital structure provides better support for term financing rather than working capital financing. Total classified loan of all NBFIs stood at Tk.7.1 billion in December 2008 against
their total outstanding loan of Tk.106.1 billion showing a classified loan to total outstanding ratio of 6.7 percent which was 7.1 percent at the end of December 2007. The return on equity (ROE), which shows the earning capacity of shareholder’s book value investment, shows significant variation across NBFIs. In June 2008, the highest ROE is observed for IDCOL (24.1 percent) followed by Prime Finance (22.9 percent) and DBH (20.9 percent). On the other hand, ROEs of several NBFIs were lower than the industry average and the interest rate on deposits indicating requirements on the part of these NBFIs to access both low cost funding and ensure better portfolio management to improve performance. 3.4b 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. Industrial Promotion and Development Company (IPDC) was the first private sector NBFI in Bangladesh, which started its operation in 1981. Since then the number has been increasing and in December 2006 it reached 29.1. Of these, one is government owned, 15 are local (private) and the other 13 are established under joint venture with foreign participation. Non-Bank Financial Institutions are an important part of financial system in Bangladesh. NBFIs operations are regulated under the Financial Institutions Act, 1993. The NBFIs consist of investment, finance, leasing companies etc. There were 29 financial institutions operating in Bangladesh as of 31 December 2006. Of these one is government owned, 15 are local (private) and the other 13 are established under joint venture with foreign participation. Bangladesh Bank has introduced a policy for loan and lease classification and provisioning for NBFIs from December 2000 on a half-yearly basis. Among the 29 financial institutions, 12 have been listed in the stock exchanges up to 31 December 2006 to strengthen financial capability and the rest are under process to be listed in due course. 3.4c 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 share of leasing and housing
finance in the total investment portfolio of NBFIs has 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. 3.5 Insurance Industry Overview: After independence of Bangladesh, insurance industry was nationalized. Subsequently through the enactment of Insurance Corporation Act VI, 1973, two corporations namely Sadharan Bima Corporation (SBC) for general insurance and, Jiban Bima Corporation for life insurance were established in Bangladesh. SBC was acting as the sole insurer of general insurance till 1984. Between 1985 to 1988 first generation of private general insurance companies were emerged as Bangladesh Government allowed the private sector to conduct business in all areas of insurance for the first time in 1984. A total of 16 private general insurance companies were registered in that phase. In 1996 another 8 private general insurance companies were registered. The third generation of private general insurance companies, which included 18 companies, came into operation between 1999 and 2001. The general insurance market in Bangladesh now consists of 43 private sector insurance companies and 1 state owned insurance company. Insurance Corporation (amendment) Act 1990 provides that 50% of all insurance business relating to any public property or to any risk or liability appertaining to any public property shall be placed with the SBC and the remaining 50% of such business may be placed with this corporation or with any other insurers in Bangladesh. But for practical reason and in agreement with the Insurance Association of Bangladesh SBC underwrites all the public sector business and 50% of that business is distributed among the existing 43 private general insurance companies equally under National Co-insurance Scheme. Insurance is not a new idea or proposition to the people of Bangladesh. About half a century back, during the British regime in the then India, some insurance companies started insurance business, particularly life, in this part of the world. Thus, Insurance industry in Bangladesh passed through a century-long history of evolution, and is still struggling to achieve maturity. After liberation, as part of the nationalization process, the industry was nationalized by a Presidential Order. Subsequently, in the process of denationalization, private sector companies were allowed to operate in the industry side by side with two state-owned corporations. Consequent to that, a good number of insurance companies emerged in a small economy which resulted in tough and unhealthy competition.
3.5a Environmental Change: ďƒź Insurance product:
The Bangladesh general insurance market is still guided by conventional business strategies which are centered on traditional products. In the absence of a dynamic platform, it has not been able to provide customized tailored made products. However, considering the forecast of the country's economy, technological vision and upcoming changes in the legislation, it is expected to grow enormously. Bangladesh economy is based on agriculture. Developing and conceiving the strategy for agriculture insurance will be a breakthrough in opening a new horizon for the country's insurance industry. Export credit guarantee could be another gateway to boost the growth rate of the insurance business. Also, with Small and Medium Enterprises (SMEs) being the active engine behind the running of the economy, developing products for this sector and catering to them is another window of unlimited opportunities for the insurance sector to grow. With the recent alarming evidences of climate changes, insurance for catastrophic coverage will remain another area of opportunity as well as the country is prone to flood, cyclone and recent risk of earthquakes. ďƒź Successive Industry Improvement: During the nationalized period, the insurance sector could not flourish as the proactive focus on customers was simply not there. The industry also lacked people with proper technical knowledge and experience. In the 3rd quarter of 1985, the private sector was allowed into the insurance sector. Since then the industry gained momentum as the private insurance companies with superior service quality and customer- oriented business approach changed the landscape of insurance industry. And the impact still continues. ďƒź Current Situation Observation: During the 1st half of 2009, the insurance industry in Bangladesh observed a 10-15% growth when compared with the same period of 2008. During the last 10 years, the private sector general insurance has experienced a growth of 197% in gross premium income, underwriting profit increased by 175% and total asset grow by 163% As the gloomy condition is prevailing in the developed countries' economies, even with some recent changes of improvement, the insurance markets in the Third World countries, and specifically Bangladesh's insurance market, have done pretty well over the last couple of years. 3.5b Prospects of Insurance Business in Bangladesh: As well as the problems mentioned above, there are many good signs for the insurance business in Bangladesh. The factors that can facilitate the insurance business in our country are discussed below. These facts can be measured as the prospective fields for insurance business in Bangladesh. ďƒź Increased population
There is a big opportunity lies ahead for the insurance companies as the population of our country are increasing day by day. Although most of people of our country live under extreme poverty level and want to avoid insurance policy number of potential policy holders in Bangladesh is growing with growth of the population. There is somewhat relationship between growing populations with the number of public vehicle. As we know all public vehicle must have an insurance policy. So growing population also increase the motor insurance too. That is growth in population opens greater scope for every kind of insurance business that results in growing prospect for insurance companies. ďƒź Developing mass awareness about insurance People are now much more conscious about their safety. So they are encouraged to take an insurance policy for making their life free from any unexpected occurrence. Increase in literacy rate is helping predominantly to create awareness among the people regarding taking insurance policy. Besides this insurance companies are also trying to eradicate the negative attitude of people towards the insurance company by organizing various programs such as seminars, programs including social responsibilities etc.
ďƒź Micro insurance Micro insurance can be a great prospective area for the insurance business in our country. Most of the people of our country are unable to have costly and long term insurance policies. Micro insurance can be provided to individual personnel or to small business owners against little insurance premiums and with easy terms and conditions. When they will afford to minimize their risks at a lower price, they will take that opportunity and they will become to get used to it. This can cover a huge portion of the society who can be a prospective target market for this business. ďƒź Development of new policy SBC has long been the sole reinsures in Bangladesh and private insurance companies were statutorily compelled to place 100% of their reinsurance business with SBC. In 1990 the government amended the relevant provisions of the insurance Act allowing 50% of all reinsurance of general insurance business to be placed compulsorily with SBC and the rest to private reinsurance companies .About 70% of premium income from general insurance business in Bangladesh is retained locally and the rest 30% goes to reinsures abroad. Permissions to private insurance companies to act as reinsures will open up new opportunities to them. This will initiate open competition between the SBC and the private reinsures within the country and will reduce the reinsurance cost and increase efficiency. This amendment of the existing rules can be another important policy making that will facilitate the insurance business in Bangladesh. The private insurance companies can argue in favours of their capability to act as reinsures on the basis of
the fact that the total capital belonging to the government owned general insurance company’s is Tk. 550 million while the private sector insurance companies own Tk.2500 million. Scope of investment Insurance companies can usually make more profit from investment activities than from their regular insurance business. The private insurance companies are realizing this fact and playing role in the financial market. Insurance companies are making large investment in government bonds, ICB projects and in private sector business. There are opportunities to enhance profit through effective and efficient money management by employing capable and experienced personnel. Scope of investment expansion persists in the areas leasing, housing, health and money market. Service diversification Insurance is not just a tool of risk coverage. It is also an attractive instrument of savings. The mixture of risk coverage with savings gives the opportunity for innovative product designing which means service diversification. In a dynamic insurance market one can expect to see new products being promoted at regular intervals. So far very little efforts have been taken to innovative and introduce need oriented insurance services in response to existing threats. The prospect of the insurance business in various sectors that affect our economy can be differentiated in the following way. Agriculture sector The economy of Bangladesh is predominantly an agrarian one, with most people engage in farming and fishing. The uncertainty of agriculture due to crop failure caused by climate variation, drought, cyclone, flood and pests affects farmer income as well as government revenue. Furthermore, in the last few years commercialization has occurred in some sections of the agricultural sector. Increase in investment in the agricultural sector is creating a new opportunity for insurance industry. Various agricultural insurance services are becoming common these days. Demand for insurance protection against crop loans, livestock loans, fisheries loans and equipment loans are also increasing day by day. Business sector Nowadays in Bangladesh the SME plays an important role in the economic development. But they are deprived from taking loans from bank for large amount. If insurance business focuses this section in Bangladesh they are able to contribute more in the economy .Thus insurance business has a bright prospect in business sector in a developing country like Bangladesh.
ďƒź Education sector Insurance companies can provide different types of scheme to expand education plan insurance. 3.6 Mutual Fund Industry in Bangladesh: Bangladesh mutual fund industry has witnessed significant unpredictability and growth in the past few years driven by several economic and demographic factors. Investors have gained around 350% of returns on the last six mutual funds participating in their Initial Public Offerings (IPO) even if those investors had sold them within the next three months after the first day's trade. This situation has motivated many investors to participate in the private placement and IPO of the mutual funds in the recent years. The other reasons are increasing confidence level of the investors, growing market capitalization, rising income and savings level, and the growing asset management companies in Bangladesh. Mutual Fund Industry in Bangladesh (As of December, 2010) Assets Under Mutual Fund (Taka in Mn) Assets Under Mutual Fund in terms of Market Capitalization Assets Under Mutual Fund to GDP Ratio
39587 1.24% 0.64%
Until December, 2010 there are 35 mutual funds in Bangladesh. These are managed asset management companies such as AIMS, BDBL, ICB, ICB AMCL, RACE, LR GLOBAL. Number of Mutual Funds No. of Open end funds No. of Close end funds No. of Asset management companies
35 4 31 12
The growth of mutual funds industry did not comply with the market growth. Assets under mutual funds increased at a CAGR of 23% in last 5 years, but industry capitalization percentage total market is gradually decreasing. The market capitalization of mutual fund industry is only 1% of total capitalization, whereas in India it is 15% and in Pakistan 8% of total market capitalization. So the regulatory concern about more mutual funds in Bangladesh was totally illogical, rather more mutual funds would lessen more speculative trading, which would eventually bring more stability in the market. Many banks and financial institutions are in the queue with the proposals for their funds. A number of proposals for new mutual funds are awaiting approval. Current performance of the mutual funds in the secondary market of Bangladesh has not yet been noteworthy. The return is well below the annualized market return of approximately 29% in the Dhaka Stock Exchange. Realizing this high demand-supply gap in the private placement and IPO, in the recent times, there have been many new issues of mutual funds who have already finished the
formalities with the regulators, and many others whose proposals are on the board positively. This is essentially a strong signal for the development of an organic capital market, offering a safe alternative investment avenue for the investors that really can reduce the excessive and aggressive dependence on equity stocks. Although at the pre-IPO or IPO phase, investors are profiting well, the secondary market for mutual funds has remained much less profitable. Since investors are not really impressed by the marginal performance of the mutual funds; they feel reluctant to put money in them in the secondary market. Many of the investors have complained of waiting too long for a point difference benefit or facing forced sale to avoid further loss and recover he opportunity loss. Therefore, the consequence is clear. A dull secondary market for mutual funds has been restricting investors from taking advantage properly, and thus making more and more investors negative towards them. Less demand in the secondary market is essentially making the IPOs or Private placements much less attractive since investors at these stages fear losing money, or even illiquidity of their investment. A couple of potential fund issuers have recently expressed a fear of illiquidity for their potential new fund issues. This is quite rational and almost inevitable. Asset Management Company AIMS ICB ICB AMCL BDBL RACE LR GLOBAL
Net Asset of Total Industry 18% 13% 36% 4% 23% 6%
There are 12 asset management companies operated in our country. They managed 35 mutual funds. In these 12 asset management companies, the mutual fund industry is dominated by 6 asset management companies. There are 4 open end mutual funds in Bangladesh, among these 3 managed by ICB and another one is managed by Prime Finance.
Asset under mutual fund industry growth is not a diverse event from the economy. Its growth depends not only in capital market growth, but also in economic growth as well. Bangladeshâ€™s GDP is growing at a 6%. National savings as a percentage of GDP has grown 28% to 32% from 2005-2006 to 2009-2010.
Most of the savings goes to bank deposits around 58%. 3.7 The Capital Market: Capital market is a mechanism to flow fund from the hands of small savers (individuals and institutions) at low costs to those entrepreneurs who do need fund to start business or to business. In the other words, capital market mechanism gives a part ownership of big companies/corporations to small savers like you and me. In simple term, it is a globally accepted scheme to share ownership of economic development with general public. The Capital market, an important ingredient of the financial system, plays a significant role in the economy of the country.
ďƒź 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. ďƒź Participants in the capital market: The SEC has issued licences 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 closedend & 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. Total Number of Listed Securities Total Number of Companies Total Number of Mutual Funds Total Number of Debentures Total Number of Treasury Bonds Total Number of Corporate Bonds
489 231 35 8 212 3
The total number of listed securities is 489. Product of capital market in Bangladesh consists of a) Shares, b) Debentures, c) Mutual funds, d) Bonds. Total number of Shares/Certificates: Total Number of Shares & Mutual Fund Certificates of All Listed Securities
(No. in mn) 19,240
Total Number of Shares of All Listed Companies
Total Number of Certificates of All Listed Mutual Funds
Total Number of All Listed Debentures Total Number of All Listed Gov. T-Bonds Total Number of All Listed Corporate Bonds
(No. in ' 000) 409 5,002 7,069
In our Bangladeshi Capital market the total number of shares of all listed companies is 16,465mn. Derivatives, Future and options are not traded in our capital market. Total Issued Capital of : (Figure Tk. in mn) 796,137
(Figure US$ in mn) 10,870.52
All Listed Securities 262,095
All Companies Shares All Mutual Funds All Debentures All Listed Govt. T-Bonds All Listed Corporate Bonds Bangladeshi Capital market consists of only 7,069mn issued capital for listed corporate bonds. So, Bond market in Bangladesh is not well established. And Capital Market consists of only 25,719mn issued capital for mutual funds. Total Market Capitalization of :
(Figure US$ in mn) (Figure Tk. in mn) 35,485
All Listed Securities
All Companies Shares
28,067 479 All Mutual Funds
All Debentures 6,842 All Listed Govt. T-Bonds
All Listed Corporate Bonds 3.7a DSE Sectoral Performance - May 2011:
Banks Financial Institutions Insurance Mutual Funds Total
Market Capitalisation (in mn) May April 579,130.11 588,721.11 277,726.07 264,318.53 145,319.72 134,867.46 34,327.11 35,060.38 1,036,503.0 1,022,967.4 0 7
% of total Mkt Cap
Turnover Tk. (in mn)
May 27.94 12.54
% of total Turnover
11,545.53 1.66 2,483.03 48.55 40,697.12
48.55% of total market capitalization is the financial sector in Bangladesh. Among those, banks contribute 27.94% to the total capitalization. Mutual funds contribute only 1.66% to the total capitalization of our Capital Market.
44.13% of total turnover is the financial sector in Bangladesh. Among those, Banks contribute highest 17.38% to the total turnover in our capital market. And mutual funds contribute only 2.69% to the total turnover in our capital market among the financial sector in Bangladesh. 3.7b Sectoral P/E - May 2011: Sector
Sectoral Price Earnings Ratio Mar-11 Dec-10 Apr-11 Bank 10.75 25.24 10.27 Financial 24.47 47.27 Institutions 21.14 Mutual 10.91 17.53 10.32 Funds
16.33 32.45 25.26 29.06 20.37
3.8 Bangladeshâ€™s Financial Sector Risks and Stability: 3.8a Bangladeshâ€™s Financial sector Risks: Drawing on the lessons from the global crisis, sound principles for the governance, design, and implementation of stress testing programs at banks are needed. A sound stress testing program should (i) provide forward-looking assessments of risk; (ii) complement information from models and historical data; (iii) be an integral part of capital and liquidity planning; (iv) support internal and external communication; (v) guide the setting of a bank's risk tolerance; and (vi) facilitate the development of risk mitigation plans across a range of stressed conditions.
The need for bank supervisors to be confident of audit quality has been reinforced by a variety of factors and events. These include: concerns about the risk of audit failures, global expansion of major audit firms, and increased complexity of both accounting standards and financial instruments. In addition, the challenges associated with fair value estimation processes, which have been amplified by the current market crisis, underscore the importance of high quality audits. As such, the Basel Committee's focus is on the following areas: bankersâ€™ and supervisorsâ€™ reliance on external auditorsâ€™ expertise and judgments; high-quality audits which enhance market confidence particularly in times of severe market stress; and increasing reliance on high-quality bank audits to complement supervisory processes. For Bangladesh, policies are needed to maintain international auditing standard to avoid exposure to financial risks of different types. 3.8b Overall Policy Stance: For minimizing credit and liquidity risks in the financial market, the priority is to create a competitive banking system (covering non-bank financial institutions as well) that has the capacity to overcome maturity-mismatch and classified loan problems. It is important for the banks to effectively identify, measure, monitor, and control credit risk, as well as to understand how credit risk interacts with other types of risk (including market, liquidity, and reputation risks). The global financial turmoil highlights the importance of addressing unexpected aspects of credit, concentration, market, liquidity, legal, reputation, and all other types of risks by the local banks. The important agenda for Bangladesh would be to convert the learning from the global crisis into an opportunity for developing risk mitigating strategies. It would be important for financial sector policies to encourage the banks to use any excess liquidity in the banking system for providing credit to productive activities. The Bangladesh Bank, on its part, should strengthen its prudential oversight and closely monitor the liquidity situation in the banking system. Prudent actions are also required to implement the Basel II framework of supervision and disclosure principles toward risk management and capital planning. In this context, further strengthening of the diagnostic review of the financial health of the banks, currently undertaken by the Bangladesh Bank, would contribute toward improving their operational efficiency and financial viability. In addition, it would be important for the Bangladesh Bank to continue its efforts in urging the banks to reduce their lending rates, increase competition among the financial intermediaries, and pursue strong monitoring and supervision measures so that the financial institutions reduce administrative cost by improving efficiency and reducing the burden of nonperforming loans. Chapter 4 Leasing Sector in Bangladesh 4.1 Lease Financing:
Lease is a contract between the owner and the user of assets for a certain time period during which the second party uses an asset in exchange of making periodic rental payments to the first party without purchasing it. Under lease financing, the lessee regularly pays the fixed lease rent over a period of time at the beginning or at the end of a month, 3 months, 6 months or a year. At the end of the lease contract the asset reverts to the real owner. However, in case of long-term lease contracts, the lessee is generally given the option to buy the leased asset or renew the lease contract. The three major types of leases are ďƒˇ ďƒˇ ďƒˇ
Operating lease, Financial/capital lease Direct financing lease.
The operating lease is a short-term lease contract where the lessor bears all operating and repairing costs of the asset and the lessee pays periodic rental payments to the lessor, and where the lease is cancelable, and there is no bargain purchase option. Financial/capital lease is a long-term lease contract where the lessee bears all operating, repairing and maintenance costs, and makes periodic rental payments to the lessor. The lease is not cancelable and the lessee has the option for bargain purchase or renewal of lease contract at the end of the original lease period. In a direct financing lease, the lessor leases the asset by manufacturing or by purchasing from the manufacturer to the lessee directly and the lessee makes regular rental payments to the lessor. The lessor holds the ownership of the asset until the end of the lease period and the lessee holds the possession of the asset. In addition to these major types, there are some other types of lease such as sale and lease and leveraged lease. Legally, a leasing company is defined as one having the business of hiring plants or equipment or of financing their hire by others. The International Finance Corporation promotes leasing as a method of financing industrial development in the developing countries as a part of its capital market development strategies. 4.1a History of Lease Financing: Lease financing was first introduced in Bangladesh in the early 1980s. Industrial Development Leasing Company of Bangladesh Ltd. (IDLC), the first leasing company of the country, was established in 1986 under the regulatory framework of Bangladesh Bank. It was a joint venture of the Industrial Promotion and Development Company of Bangladesh Ltd. (IPDC), International Finance Corporation, and Korea Development Leasing Corporation. Another leasing firm, the United Leasing Company Ltd. (ULC) started its operations in 1989. The number of leasing companies grew quickly after 1994 and by the year 2000, rose to 16. The leasing business became competitive with the increase in the number of companies and wider distribution of their market share. There are, however, 6 other companies conducting leasing business in the country, although they do not use the word leasing in their names. In
terms of money value, the leasing business in Bangladesh increased from Tk 41.44 million in 1988 to Tk 3.16 billion in 2000. The leasing companies now operating in the country are Industrial Development Leasing Company of Bangladesh, United Leasing Company, GSP Finance Company (Bangladesh), Uttara Finance and Investments, Bay Leasing and Investment, Phoenix Leasing Company, Prime Finance and Investment, International Leasing and Financial Services, Union Capital, Vanik Bangladesh, Peoples Leasing and Financial Services, Bangladesh Industrial Finance Company, UAE-Bangladesh Investment Company, Bangladesh Finance and Investment Company, and First Lease International. 4.2 Industry Overview: The financial sector in Bangladesh comprises the money and capital markets, insurance and pensions, and microfinance. In addition to the Bangladesh Bankâ€”the central bank of Bangladeshâ€”there are 4 state-owned commercial banks (SCBs), 5 state-owned specialized banks, 30 domestic private commercial banks (PCBs), 9 foreign commercial banks, and 29 nonbank financial institutions (NBFIs) as of 2008. There were 29 NBFIs operating in Bangladesh as of 2008. Of these institutions, 1 is government owned, 15 are local (private), and the other 13 are established under jointventure arrangements with foreign institutions. The minimum capital requirement of NBFIs is Tk250 million. The major business of most NBFIs is leasing, although some are also engaged in merchant banking and housing finance.
Financial Sector in Bangladesh
Insurance and Pension and Provident Funds
1. Bangladesh Bank
1. Securities and Exchange
1. Controller of Insurance
1. Non government
2. All banks
2. General and life
3. Nonbank financial
2. Stock exchanges: Dhaka Stock
Exchange and Chittagong Stock
3. Government Pension
2. Palli Karma Shahayak
5. Credit rating agencies
3. Investment Corporation of
4 Central Provident Fund
3. Grameen Bank
5. Private sector pension
4. Bangladesh Rural
4. Merchant banks
funds (typically small
Development Board and other nongovernment organizations,
As leasing business is the major business of NBFIs and most of the NBFIs are multi product financial intermediaries, our industry analysis focus on the performance of NBFIs of Bangladesh and through NBFIs we highlights leasing business of Bangladesh. The operations of NBFIs in Bangladesh are regulated by the BANGLADESH BANK. Nonbank financial institutions (NBFIs) are licensed and controlled by the Financial Institutions Act of 1993. These institutions • •
Give loans and advances for industry, commerce, agriculture, or housing; Carry on the business of underwriting or acquisition of, or the investment or reinvestment in, shares, stocks, bonds, debentures, or securities issued by the government or any local authority;
Engage in hire-purchase transactions, including leasing of machinery or equipment;
Finance venture capital;
Provide loans for house building and property purchases; and
Use their capital to invest in companies.
4.2a Investment Portfolio Mix of NBFIs (2002-2006): Investment Portfolio
EndDec 56. 7
Housing Loans Other Assets
EndJune 45. 9
3,356.5 45. 9 9
2,457.8 33. 0 6
1,026.2 3 14
Investment (Shares Equities) Total Outstanding
7,314.5 10 0 0
In a market with considerable competitive pressures from banks and other financial institutions, the leasing industry has shown significant resilience. Its total assets grew at an annual average rate of 34% during 2002–2006. Lease financing constitutes 54.5% of the total long-term assets in the country’s financial sector, with the rest consisting mainly of term financing. Leasing companies offer their services to industries such as textiles, chemicals, services, pharmaceuticals, transport, food and beverage, leather products, and construction and engineering. Some leasing companies are also diversifying into other lines of business, such as merchant banking, equity financing, term lending, and house financing. Total number of NBFIs and their year of commencement are given below. 4.3 Case Study on IDLC Finance Limited: 4.3a IDLC at a Glance: IDLC Finance Limited commenced its journey in 1985, as the first ever leasing company of the country. In 1995, IDLC was licensed as a Financial Institution by the country’s central bank, Bangladesh Bank, following the enactment of the Financial Institution Act 1993. Over the last two and a half decades, IDLC has grown in tandem with the country’s transition into a developing country and has emerged as Bangladesh’s leading multiproduct financial institution. To encapsulate the evolving nature of the company, IDLC has changed its name to IDLC Finance Limited from earlier Industrial Development Leasing Company of Bangladesh Limited in August 2007. Since 1985, when IDLC was formed as the pioneering leasing company in Bangladesh, the company continues to evolve as an innovative financial solutions provider. IDLC is now able to offer its customers, integrated and customized financial solutions - all under one roof. The Company’s wide array of products and services range from retail products, such as home and car loans, corporate and SME products including lease and term loans, structured finance services ranging from syndications to capital restructuring and a complete suite of merchant banking and capital market services. Shareholding Structure at the year end 2010:
Institutions hold highest 51% share of IDLC Finance Limited. Individuals hold 13% and Sponsors hold 36% of shares of IDLC Finance Limited.
Total Loan & Lease Amount: Unclassified (UC)
Standard SMA Classified SS DF B/L Total Balance Outstanding of Loan and Lease amount
2009 20,284,976 357,780 135,398 54,294 413,359 21,245,806
2010 18,337,864 208,699 154,415 63,382 440,154 19,204,514
The highest portion of lease and loan amount in the year 2009 is unclassified. And the highest portion in the year 2010 is also unclassified. To encounter and mitigate business volume risk the following risk mitigation measures are in place, at IDLC: Regular review of impact of global economic meltdown and taking appropriate measure; Innovative and convenient financial products and services;
Taking prompt action on customer complaints; Frequent assessment of clients satisfaction; Regular review of performance against budget and targets; Review and analysis of competitors’ performance;
The non-performing loan ratio decreases in 2010 in comparison to previous years. It indicates that IDLC is performing well in terms of loan disbursement. Sector wise exposure- December 31, 2010: Apparels & accessories Food & Beverage Transport Service Housing & Real estate Pharmaceuticals Textile exports Financial services Iron & Steel
8.43% 8.38% 8.26% 7.44% 5.81% 5.45% 5.94% 6.39% 5.02%
Agro based industry Power & energy Education Household Products Packaging IT Building Materials Engineering Others
3.69% 4.40% 3.33% 3.44% 2.94% 2.63% 4.05% 1.74% 12.64%
IDLC’s highest exposure is apparels & accessories, food & beverage and transports sectors. 4.3b Contribution to Economic development: IDLC plays its role as an active partner of the economic development of the country. As stated earlier, the company has extended its financial services to the wider community through SME financing. At the same time for the industrialization of the country, IDLC provides industrial loan and related other services. In the other hand, IDLC has a significant
contribution to the national excheqre by the duly paying corporate and other taxes and levies as imposed by the Government. The picture will be much clearer from our Value Added statement. IDLC is always compliance with the Government’s various monetary and fiscal policies. IDLC is very much aware of the worldwide financial crimes occurred recently. To combat financial crime, IDLC has implemented Anti- Money Laundering program as instructed by Bangladesh Bank with the objective to prevent teriost financing worldwide. Market Capitalization: Market capitalization of IDLC Finance Limited increases from 2006 to 2010. Its Market capitalization in 2006 was only 1,176 million. And in the year of 2010 IDLC’s market capitalization is 27,888 million taka.
Market value addition:
The growth of Market value addition of IDLC Finance Limited is 22.06%. the Market Value addition increases year to year. And it is 4032 million in 2010. ďƒź Contribution to national economy: IDLC Finance Limited commenced its journey in 1985 as the first leasing company in the country. With its pioneering role, IDLC has made the lease financing popular in the country and developed the leasing industry, which has a total investment more than BDT 250 billion now, as a vibrant financial intermediary in the medium term financing segment in the country. IDLC is continuously increasing its focus on financing to Small and Medium Enterprises (SMEs), the engine for growth for any developing economy. During the year under report, the Company has deposited BDT 575 million to the Government Exchequer as corporate income tax, withholding tax and VAT. 4.3c Financial Performance of IDLC: ďƒź Operating Income:
IDLC’s operating income increases from 2006 to 2010. Its operating profit was 479 million in 2006, whereas it is 3027 million taka in year 2010. Profit:
From the above graph we can see both profits before tax and profit after tax of IDLC Finance Ltd. increases from 2006 to 2010. In 2006, its profit before tax was 236 million and profit after tax is 157 million taka, whereas its profit before tax of IDLC Finance Limited is 1956 million and profit after tax is 1327 million taka in the year 2010. Total Assets:
Total assets of IDLC were 11680 million taka in 2006. And the total assets of IDLC Finance increase from year to year. In the year 2010 it is 26920 million taka. Shareholders’ Equity: `
Like other increased financial indicator, IDLC’s Shareholders’ equity increases from year to year. And it is 3690 million taka in 2010. Return on total assets:
IDLC’s performance is satisfactory in terms of return on total assets. Because return on total assets of IDLC Finance limited increases from year to year. And it is 5.35% in 2010 Return on Shareholders’ Equity:
Like return on total assets, IDLC increases its return on shareholders’ equity. It is 43.64% in 2010 that is higher than the previous years. Earnings per Share:
The EPS of IDLC Finance Limited was only 26, whereas it is 221 in 2010. So, the performance of IDLC Finance Limited is satisfactory in terms of EPS. Debt-Equity Ratio:
Debt to equity ratio measures total debt financing from the creditors relatives to the equity of the firm.
ďƒź Cost Income Ratio:
The cost income ratio decreases to 31.25 in 2010 in comparison to 37.36 in 2006. IDLC should reduce cost income ratio. ďƒź Lease Finance:
The growth of lease finance is -6.30%. Although IDLC was established as a leasing company, its portfolio diverts to another sectors. 4.4 Case Study on United Leasing Company: 4.4a Introduction: United Leasing Company Limited a joint venture non-bank financial institution engaged mainly in lease finance business and bills discounting. It was incorporated on 27 April 1989 as a public limited company under the companyâ€™s act 1994 with an authorized capital of Tk 1,000 million. On 31 December 2000, its paid up capital was Tk 70 million, of which foreign and domestic sponsors held 40.29% and 33.57% respectively and the remaining 26.14% was held by institutional shareholders (19.46%) and the general public (6.68%). Foreign sponsors of the company are Asian Development Bank (ADB), Commonwealth Development Corporation and Lawrie Group Plc of the UK. Sponsors in Bangladesh are Duncan Brothers (Bangladesh) Ltd, Shaw Wallace Bangladesh Ltd, National Brokers Limited, Octavius Steel & Co. of Bangladesh Limited and the United Insurance Company Limited. The company is listed with the Dhaka Stock Exchange Ltd. On 31 December 2000, the total assets of the company were valued at Tk 1,482.11 million, 76.98% of which accrued to leased assets. Liabilities of the company included capital and reserve funds Tk 434.22 million, long-term loans from local and foreign sources Tk 867.63 million, and lease deposits Tk 180.26 million. Sources of funds of the company are mainly commercial banks. The company is eligible to receive fund from the World Bank sponsored Financial Institutions Development Project (FIDP) at concessionary interest rates. Number of lease contracts made and executed upto 31 December 2000 was 373 with total monetary involvement of Tk 1,119 million. The company performed relatively well in terms of profitability and it paid dividend @ 30% in 2000. 4.4b Products & Services of ULC:
ULC offers the products & services: Lease Finance, Deposit Scheme, term loan etc. Under Lease finance United Leasing Company provides:
Industrial machinery and motor vehicles at concessionary term. Machinery and Furniture for Hospital use. Truck or Bus for Transportation. Equipment or Furniture for Official use.
Products / Services of UCL
United Leasing Company
Insurance 2. General and 4.4c Performance Analysis of ULC: Current Ratio:
life insurance companies 3. Government Pension Scheme 4 Central Provident Fund 5. Private sector pension funds (typically small
Current ratio measures a company’s liquidity and short term debt paying ability. United leasing company always maintains a sound liquidity position for operating the business. Debt to Equity Ratio:
Debt to equity ratio measures total debt financing from the creditors relatives to the equity of the firm. Its debt to equity ration increases. Return on Equity:
Return on equity measures the profitability of the firm from common stock holder’s view. This ratio show how many taka of net income were earned for each dolled invested by the owner. Return on equity is higher in the beginning of the year and it gradually reducing and in 2008 the ROE is 14%. Net Asset Value per Share:
The increase of the value of the share shows the good condition of the firm. Increase in net asset value shows that the price of the share is increasing relative to the asset of the firm. The net asset value is increasing yearly which shows good condition of the firm. ďƒź Earnings per Share:
It measures the net income earned on each share of common stock. It is computed by dividing net income by the number of weighted average common shares outstanding during the year. EPS in 2008 is 66 taka which is relatively high in comparison to 2007 and 2006 but low in compression to 2005 and 2004. ďƒź Cash dividend:
Every year firm provides some cash dividend to its shareholders, which is relatively same over the last 5 years it indicates that firm maintains a constant dividend policy. This cash dividend is an important indicator of the good condition of the firm. ďƒź Debt to total assets:
Debt to total assets ratio measures the percentage of the total assets provided by the creditors. We get it by dividing total debt by total assets. This ratio indicates the companyâ€™s degree of leverage. The debt to total asset ratio of ULC is increasing over the last five years which is a clear indication that firm becomes more inclined to finance new asset through debt. Firms become more leverage day by day. 4.4c Finance Lease Obligation: Finance lease obligation comprises the liability arisen from asset taken under finance lease from different financial institutions.
2008 Balance at January 01 Received during the year Repaid during the year Balance at December 31 Less: Current maturity Finance lease obligation – non current
1,320,959 (1,143,163) 177,796 181,876,191 212,848,043
2007 3,201,910 (1,880,951) 1,320,959 124,075,363 261,172,637
4.5 Challenging Issues for Leasing Companies: Sources of Funds: NBFIs collect funds from a wide range of sources including financial instruments, loans from banks, financial institutions, insurance companies and international agencies as well as deposits from institutions and the public. Line of credit from banks constitutes the major portion of total funds for NBFIs. Deposit from public is another important source of fund for NBFIs, which has been increasing over the years. NBFIs are allowed to take deposits directly from the public as well as institutions. According to the central bank regulation, NBFIs has the restriction to collect public deposits for less than one year, which creates uneven competition with banks as banks are also exploring the business opportunities created by NBFIs with their lower cost of fund. Although recent reduction of the minimum tenure of the term deposit from one year to six months for institutional investor has had a positive impact on their deposit mobilization capacity. NBFIs can develop attractive term deposit products of different maturities to have access to public deposits as these are one significant source of their funds. 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 interest rate. Thus the weighted average cost of fund for banks would be at best 7 to 8 percent, which is almost half of that of NBFIs. Asset-Liability Mismatch: Asset-liability mismatch is another cause of concern for NBFIs. Demand for funds to meet the increasing lending requirements has increased many times. But the availability of funds has become inadequate as NBFIs are mostly dependent on loan from commercial banks.
International Finance Corporation (1996) observed that leasing companies are in a great dilemma while managing the mismatch between their asset and liability. According to IFC, the average weighted life of the company’s business portfolio should be less than the average weighted life of its deposits and borrowing in its operating guidelines for a leasing company. Only one company in Bangladesh was successful in maintaining the above guideline (Banerjee and Mamun (2003)). Therefore, NBFIs have to explore alternative ways for raising funds. Average weighted life of Assets and Liabilities Source: Banerjee and Mamun (2003) Name of the NBFIs Average weighted life of Average weighted life of the Deposit and Borrowing (Years) Business Portfolio (Years) IDLC 2.94 2.84 ULC 3.64 4 PLC 1.92 2.5 BLIL 1.25 1.5 PFIL 3 3 BIFCL 3 3 BFICL N/A 3 Investment in High Risk Portfolio: It is already mentioned that cost of funds for NBFIs are higher than that of banks. In order to sustain the high cost of borrowing, NBFIs may be inclined to invest in the high return segments, which can expose them to commensurately higher risks. Moreover, fierce competition among competitors may also force many NBFIs to reduce the margin at the expense of quality of the asset portfolio. This strategy may eventually create the possibility of an increase in the non-performing accounts. Unless adequate risk management capabilities are developed, the growth prospects of NBFIs would not only be hindered but it might also be misapprehended. 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. Competition with Banks: With the advent of new NBFIs, the market share is being spread over the competing firms and the demand facing each firm is becoming more elastic. Active participation of commercial banks in the non-bank financing activities has further increased the level of competition in the industry. Leasing was considered as a non-bank financing activity until recently. But a large number of banks has also shown their interest in the leasing business and has already penetrated the market. For banks, public deposit is one major source of funds which they can collect with relatively lower cost. Thus the business environment for NBFIs has become more challenging as they have to face uneven competition with banks in terms of collecting funds. Lack of Human Resource: Skilled and trained human resource is considered as an important component for the development of any institution. Due to the recent growth of NBFIs, availability of experienced manpower is a challenge for this industry. The supply shortage of efficient resource personnel has been leading to a significant increase in the compensation package, which is also a cause of concern for NBFIs. The industry experts believe that although there exist enormous growth opportunity the market is still quite small and scope of work for skilled personnel is very limited compared to that of banks. This makes the competent personnel to switch from NBFIs to other institutions after a certain period implying low retention rate of skilled human resource. Weak Legal System: Although the default culture has not yet infected NBFIs to any major extent, they face difficulties in recovering the leased assets in case of a default. Moreover delays in court procedures create another cause of concern. The situation cannot be improved only by making the legal system stronger through enactment of new laws rather ensuring proper implementation existing ones is more of concern. Lack of 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.
Conclusion Despite the slowdown of economic activities during first half of financial year (FY) 20092010 due to the slow recovery of the world economy from the global financial crisis, Bangladesh attained reasonably high GDP growth of 5.8% in FY 2009-2010, slightly higher than the 5.7% growth in FY 2008-2009. The growth was broad based covering agriculture, industry and service sectors and mostly led by strong domestic demand along with slowly increasing external demand as recovery is gradually taking place in major economies from global financial meltdown during the last half of FY 2009-2010. Industry sector growth slowed down marginally to 6.01% in FY 2009-2010 from 6.46% growth in FY 20082009. The service sector which represents around 50% of GDP, maintained 5.9 percent growth in FY 2009-2010. Agriculture sector grew by 4.7% in FY 2009-2010 as against 4.1% growth in previous year. Leasing sector plays an important role in our economic development. Among the leasing companies in Bangladesh, IDLC Finance Limited contributes highest to the national economy. On the other hand, United Leasing Company performs very well now-a-days. And it also contributes to our national economy. But leasing sector faces several problems in our country. Steps should be taken to remove the problems of leasing sectors in Bangladesh. Bibliography •
BLFCA yearbook 2008
Annual report of IDLC Finance Ltd 2006,2007,2008,2009,2010
Annual report of ULC 2008
Appendix IDLC Finance Limited: Mkt Cap (in million) 2006 2007 2008 2009
1176 3038 5723 11109
Operating Income (in million) 479 883 1179 1913
Profit Profit after Total Assets (in before tax tax (in million) (in million) million) 236 157 11680 475 303 15056 708 406 17342 1273 822 22681
2010 2004 2005 2006 2007 2008
Current Ratio Debt to ROE (%) NAV per equity ratio share 27888 3027 1956 1.33 5.9 23 1.39 5.3 22.6 0.9 5.7 13.8 1.08 6.2 14.5 1.09 6 14
Return on total assets
2006 2007 2008 2009 2010
Shareholders' Equity (in million) 952 1247 1611 2393 3690
2006 2007 2008 2009 2010
Cost Income Ratio 37.36 30.8 29.86 25.61 31.25
Non-performing Lease Finance (in MVA (in million) loan ratio million) 4.74 5001 625.33 4.62 4571 1311.09 4.5 4734 2020.45 3.62 4383 3304.15 3.07 4107 4032.97
EPS 2004 2005 2006 2007 2008
67 78 53 62 66
1.57 2.37 2.5 4.11 5.35
345 408 445 484 496
Return on EPS Debt-Equity Shareholders' Ratio Equity 17.45 26 9.28 27.59 51 9.54 28.43 68 8.32 41.05 137 8.48 43.64 221 6.3
Cash Debt to total Dividend (%) assets (%) 18 22.13 19 25.3 18 26.65 18 28.18 20 33.33