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 are-
a) 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:
ü Processing of Data:
Data have been processed with the help of Microsoft excel.
ü 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.
ü 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:||$100.00 bn (at current prices 2010-11)|
|GDP per capita:||$664 (at current prices 2010-11)|
|GDP growth rate (%):||6.0 (at constant prices 2009-10)|
|Total exports:||$16.20 bn (2009-10)|
|Total imports:||$23.74 bn (2009-10)|
|Total FDI:||$0.913 bn (2010)|
|Forex reserves:||$10.700 bn (Nov 2010)|
|Currency:||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 $11 billion in FY10, accounted for almost 25% of GDP.
GDP at current price
|GDP data||2006-07||2007-08||2008-09||2009-10||2010-11 (p*)|
|GDP (bn taka)||
|GNI* (bn taka)||
|Per capita GDP (in taka)||33607||38330||42628||47536||53236|
|Per capita GNI (in taka)||36116||41728||46504||51959||57652|
|Per capita GNI (in US$)||523||608||676||751||818|
2.1a Economic Environment:
Remains one of the world’s poorest, most densely populated, and least developed nations. Major impediments to growth include frequent cyclones and floods, the inefficiency of state-owned 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.
Economy based on agriculture, mainly jute, rice, sugarcane, tea, tobacco, and wheat. World’s largest producer of jute. Fishing is also important.
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||Business freedom (%)||Trade freedom (%)||Monetary freedom (%)||Investment freedom (%)|
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%. Bangladesh’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 supply (narrow)||506.50||593.15||664.27||879.88||971.63|
|Money supply (broad)||2,119.86||2,487.95||2.965.00||3,630.31||4067.85|
|Scheduled banks time deposits||1,613.36||1,894.80||2,300.73||2,750.43||3096.22|
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.
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, “Financial Market can be thought of as the brain of the entire economic system, the central locus of decision making”. In fact, the financial system’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 Bank’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 ‘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. Bangladesh’s financial sector has shown remarkable resilience to the upholding global financial turmoil and slowing growth in high income countries, largely due to the country’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 country’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
|Lending rate||Deposit Rate||Spread|
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 long-term 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 industry’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:
ü 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.
ü 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.
ü 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.
ü 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
ü 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
ü 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.
ü 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
ü 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.
ü 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.
ü 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.
ü 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.
ü 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)||39587|
|Assets Under Mutual Fund in terms of Market Capitalization||1.24%|
|Assets Under Mutual Fund to GDP Ratio||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||35|
|No. of Open end funds||4|
|No. of Close end funds||31|
|No. of Asset management companies||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||Net Asset of Total Industry|
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. Bangladesh’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.
ü 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.
ü 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 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.
|Total Number of Listed Securities||489|
|Total Number of Companies||231|
|Total Number of Mutual Funds||35|
|Total Number of Debentures||8|
|Total Number of Treasury Bonds||212|
|Total Number of Corporate Bonds||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:||(No. in mn)|
|Total Number of Shares & Mutual Fund Certificates of All Listed Securities||19,240|
|Total Number of Shares of All Listed Companies||16,465|
|Total Number of Certificates of All Listed Mutual Funds||2,762|
|(No. in ‘ 000)|
|Total Number of All Listed Debentures||409|
|Total Number of All Listed Gov. T-Bonds||5,002|
|Total Number of All Listed Corporate Bonds||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)||(Figure US$ in mn)|
|All Listed Securities||796,137||10,870.52|
|All Companies Shares||262,095||3,579|
|All Mutual Funds||25,719||351|
|All Listed Govt. T-Bonds||501,113||6,842|
|All Listed Corporate Bonds||7,069||97|
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 Tk. in mn)||(Figure US$ in mn)|
|All Listed Securities||2,598,824||35,485|
|All Companies Shares||2,055,583||28,067|
|All Mutual Funds||35,060||479|
|All Listed Govt. T-Bonds||501,113||6,842|
|All Listed Corporate Bonds||6,492||89|
3.7a DSE Sectoral Performance – May 2011:
|Financial Sector||Market Capitalisation (in mn)||% of
|Turnover Tk. (in mn)||% of