Report on

Non-bank Financial Institutions (FI) in Bangladesh: Current State and Future Direction

Submitted to

Mohammad Arman, PhD, FRM

Assistant Professor
North South University

Submitted By

Name Id

S. M. Ashikur Rahman 222 5242 660

Moushan 223 5233 660

Sheikh Sayma Siddika 221 5046 060

Sadia Mamtaz 212 5405 660

Nowrose Parveen 213 5456 060

Submission Date
November 25th, 2023.
Abstract

The present study investigates the function and consequences of Non-Bank Financial

Institutions (NBFIs) in Bangladesh. NBFIs have become essential players in Bangladesh's

financial industry, meeting financial requirements and advancing financial inclusion. This

thorough research provides a comprehensive analysis of the current situation of non-bank

financial institutions (NBFIs) in Bangladesh. It suggests possible future paths in risk

management, financial inclusion, digital transformation, and cooperation.

Introduction

A financial organization that isn't technically a bank because it doesn't have a complete banking

license or isn't under the jurisdiction of a national or international banking regulatory body is

known as a non-banking financial institution (NBFI) or non-bank financial corporation

(NBFC). It includes insurance companies, venture capitalists, currency exchanges, and specific

microloan organizations. NBFIs are crucial to Bangladesh's real estate industry and capital

market. Bangladesh Bank uses a risk-based supervisory approach to oversee NBFIs. In

Bangladesh, there are 35 NBFIs. Bangladesh's first private sector NBFI was the Industrial

Promotion and Development Company (IPDC). Regulators, policymakers, industry

stakeholders, and the larger economic landscape must comprehend the dynamics and

possibilities of NBFIs in Bangladesh.

The current state of NBFIs in Bangladesh

In Bangladesh, we have 35 NBFI’s, of which the first was established in 1981. Out of the total,

two are fully government-owned, one is the subsidiary of a SOCB, 19 were initiated by private

domestic initiative, and 13 were undertaken by joint venture initiative. As of March 2023, the

average NPL ratio for NBFIs was 24%. However, for 16 NBFIs, the NPL ratio was over 30%.
Six NBFIs had NPL ratios of over 90%. The high NPL ratios are due to several factors,

including the default of large borrowers, intense competition with banks, liquidity pressure, a

tarnished image due to scandals involving some NBFIs, and difficulties faced by borrowers

due to the economic slowdown.

The Bangladesh Bank is taking steps to address the challenges facing NBFIs. These include

strengthening the regulatory framework for NBFIs, providing liquidity support to NBFIs, and

encouraging NBFIs to focus on lending to priority sectors.

Diverse services

Non-bank financial institutions (NBFIs) in Bangladesh offer a diverse range of services,

including Leasing and finance, Investment banking, Merchant banking, Asset Management,

Microfinance, Factoring, Discounting, Stockbroking, Mutual funds, Insurance, and Forex

trading.

Regulatory framework

NBFIs in Bangladesh are regulated by the Bangladesh Bank (BB). The BB has issued several

regulations to govern the operations of NBFIs, including:

• The Non-Bank Financial Institutions Regulation, 2006

• The Corporate Governance Guidelines for Non-Bank Financial Institutions, 2010

• The Risk Management Guidelines for Non-Bank Financial Institutions, 2012

• The Prudential Guidelines for Non-Bank Financial Institutions, 2014

Asset growth

The asset growth of NBFIs in Bangladesh has been impressive in recent years. The total assets

of NBFIs grew from BDT 860.3 billion in June 2020 to BDT 1120.9 billion in June 2023. This
represents a growth of 29.8% over the three years. The development of NBFIs is expected to

continue in the coming years. NBFIs are playing an increasingly important role in the financial

system in Bangladesh, and they are well-positioned to meet the growing demand for financial

services.

Role of SME financing

NBFIs play a significant role in SME financing in Bangladesh. As of June 2023, NBFIs had

outstanding loans to SMEs of Tk 295.25 billion, accounting for 32% of their total loan

portfolio. NBFIs offer a variety of SME financing products, including Term loans, Working

capital loans, Equipment financing, Invoice financing, and Overdraft facilities.

NBFIs also offer a range of advisory services to SMEs, such as business planning and financial

management.

Digital Transformation

Cloud adoption has sparked the start of the digital transformation path for many enterprises

across the globe. Prominent companies in Bangladesh are also quickly modernizing their

operations by implementing cloud computing and creating digital firms. Enterprise resource

planning (ERP) system adoption and implementation marked the beginning of many of these

organizations' digital transformation; currently, some are beginning to upgrade these systems

to cloud-enabled solutions. ERP systems were directly used on cloud servers by those who

began implementing them later. Furthermore, a lot of businesses have migrated their office

automation software like spreadsheets and emails to the cloud.

In addition to the government's initiative, the nation's central bank began actively utilizing

technology to provide financial services to more individuals, especially those residing in

remote locations. Bangladesh deserves the distinction of being considered an "early starter"
when it comes to advancements in digital finance. Perhaps the best way to illustrate how NBFI's

silent revolution in digital finance has helped the nation deal with the pandemic is to look at

the achievements. Digital platform has benefited greatly from the quicker speed of internet

banking as well, especially during lockdowns. Users of financial services have benefited from

NBFIs and fintech startups working together to mutually enhance their services. More

specifically, the nation adopted these two advances in digital finance rather early on as a result

of the central bank's courageous and wise policy decisions.

Financial Inclusion

Bangladesh faces challenges in achieving financial inclusion, particularly for women, small-

scale farmers, and informal businesses. Financial literacy is crucial for success, and the World

Bank defines financial inclusion as access to affordable products and services. Despite

government efforts, high interest rates, a large population, and low rural literacy hinder

progress.

The rise of Financial Technology (FinTech) in Non-Bank Financial Institutions (NBFIs) has

played a vital role in promoting economic inclusivity. NBFIs leverage technology to provide

innovative financial services, reducing reliance on traditional banking. Bangladesh Bank

believes this approach enhances financial stability by reducing credit risk and improving

liquidity.

NBFIs' FinTech platforms empower individuals and businesses, offering digital access to

services like insurance, remittances, savings, credit, and payments. This aligns with the

government's "Digital Bangladesh" vision, emphasizing technology in business. NBFIs have

rapidly evolved, contributing significantly to the nation's financial inclusion goals.

Future directions for risk management in NBFIs in Bangladesh

Effective risk management is crucial for non-bank financial institutions (NBFIs) in

Bangladesh. Key steps for improvement include investing in qualified risk management

professionals, implementing comprehensive frameworks aligned with Bangladesh Bank's

guidelines, and leveraging technology for efficient processes.

Bangladesh Bank promotes sound risk management in NBFIs through issuing guidelines

covering credit, market, operational, and liquidity risks. Regular assessments identify areas for

improvement, and the central bank provides training to enhance risk management practices.

Overall, robust risk management is vital for the stability and success of NBFIs in Bangladesh.

Bangladesh Futures directions for NBFIs in Bangladesh: Collaboration

Collaboration is crucial for non-bank financial institutions (NBFIs) in Bangladesh to enhance

risk management. NBFIs can collaborate internally to share risk information and develop joint

initiatives. Collaborating with banks allows them to leverage established risk management

tools, while partnerships with insurance and asset management companies provide avenues for

risk reduction.

Bangladesh Bank (BB) can promote collaboration by offering a platform for discussions,

facilitating joint initiatives, and providing financial support. Overall, collaboration is key for

NBFIs to share information, best practices, and technology, contributing to improved risk

management practices.
Research-Opportunities

As Bangladesh's economy expands, there will be more opportunities for NBFIs to advance to

the next level. There are several places where NBFI can help. Those can be discovered via

proper research and development.

Skill Development: Research can help identify skill gaps in the workforce, leading to

recommendations for training and development programs to enhance the capabilities of NBFI

professionals. They could collaborate with educational institutions or establish a training center

to offer the required training to be the global leader.

Alternative Sources of Fund: The NBFI sector requires diverse funding sources. Research

can uncover innovative funding options, contributing to sector growth and stability as we are

noticing that customer is not interested in depositing their money in NBFI due to BB cap where

BFIs are offering more than that.

Product Diversification: Diversifying the product offerings of NBFI is essential. Research

can pinpoint new opportunities and innovative financial solutions to avoid intra-industry

competition & attract new customers. We've got our remittance warriors, who are working

relentlessly to keep our economy moving. NBFI can design a product for them to invest in at

home.

Foreign Investment: The NBFI sector can benefit from foreign investments. Research can

analyze opportunities, challenges, and provide insights into attracting foreign capital.

Regulatory Framework: A robust regulatory framework is essential. Current law needs to be

updated. Research can evaluate existing regulations, identify gaps, and suggest improvements.

Financial Literacy Rate: Improving the financial literacy rate is vital. Research can assess the

current rate and propose educational programs for the populace to know the value of investment

& how it will add value to the economy.

Conclusion

Non-bank financial institutions (NBFIs) play a vital role in shaping Bangladesh's financial

landscape, contributing significantly to financial inclusion and economic development. Their

adaptability to economic, technological, and regulatory changes positions them as key drivers

of progress in the nation's financial sector. This paper underscores the need for continued

research and analysis to deepen our understanding of NBFIs and their impact on Bangladesh's

financial future.

With over two and a half decades of operation, NBFIs in Bangladesh have shown commendable

performance despite challenges. Recognizing them as catalysts for economic growth is

essential, emphasizing the importance of providing consistent support for their development.

A long-term commitment from all stakeholders is crucial to fully unleash the potential of

NBFIs and enhance their role in driving the country's economic development.
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