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Non-Bank Financial Institutions in Bangladesh

Essay by   •  August 13, 2011  •  Case Study  •  3,533 Words (15 Pages)  •  3,277 Views

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Introduction

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.

1.1 Purpose & Scope of the Report

The purpose of this report is to highlight different features of NBFIs, their contribution to the overall economy and product base of NBFIs. The report 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.

1.2 Source of Data

Due to nature of the topic of this report, here I have been used only secondary data. There are many tables and figures in this report which are based on secondary data. But I also use my analysis and personal observation method to realize better output from secondary data.

 Collection of Secondary Data:

This report studies the activities of the NBFIs on the basis of the secondary data obtained from different sources like BLFCA's Year Book (various issues), Website & periodicals of NBFIs, Bangladesh Bank, World Bank, Ministry of Finance, daily news papers, etc.

1.3 Limitations

All information regarding the organizations and their financial details were collected from their respective websites, Bangladesh Bank's website, BLFCA's website for this report. Due to time constraints, I am not able to visit and meet with officials of these organizations.

Description

The Financial system in Bangladesh consists of Bangladesh Bank (the central bank), scheduled bank, Non-Bank Financial Institutions, Micro Finance Institution (MNBFIs), Insurance companies, various co-operative Banks, and Stock Exchanges. Among the schedule Bank and other Non-Bank Financial institutions there are four nationalized commercial banks (NCBs), five (05) state owned specialized banks, thirty (30) domestic private commercial banks (PCBs), nine (09) foreign commercial banks and twenty nine (29) Non-Bank Financial institutions (NBFIs).

2.1 Background of Non-Bank Financial Institutions (NBFIs) in Bangaldesh

Non-Bank Financial institutions are an important part of the financial system in Bangladesh. NBFIs operations are regulated under the Non-Bank Financial institutions Act, 1993. The major business of most Non-Bank Financial Institutions in Bangladesh is leasing and term loans extended to various sectors such as textile, chemicals, services, pharmaceuticals, transport, food & beverage, leather products, construction & engineering, housing finance and few others have diversified products such as stock market, credit card, etc. 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 industry's contribution to our national economy. The total investment by the Non-Bank Financial Institutions up to June 2009 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 2009 which

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