Mohammad Abdul Karim
With the widespread anomalies and absence of good governance, scam-hit Non-Bank Financial Institutions (NBFIs) has put the economy of Bangladesh in an awkward situation.
At present 33 Non-Bank Financial Institutions are working in Bangladesh. There are 2 are totally state owned, 15 are local private and 15 are joint venture with foreign investor controlled by Bangladesh Bank.
Thus, NBFIs are financial institutions that provide financial services and products that are similar to those offered by commercial banks, but are not regulated as like as commercial banks.
NBFIs may also offer services such as microfinance, leasing, and remittances, targeting a segments of the population that does not have any access to the traditional banking system.
Consequently, Non-Bank Financial Institutions (NBFIs) in Bangladesh has become popular day by day. Though the major business of most NBFIs is leasing some are also diversifying into other lines of business like term lending, housing finance, merchant banking, equity financing and venture capital financing.
Despite several constraints, the industry as a whole is still performing reasonably well. With the assurance of all necessary supports, NBFIs will, hopefully, be able to further play a significant role in the basic financial intermediation process.
Political pressure
The failure of non-bank financial institutions (NBFIs) in Bangladesh can be attributed to a number of factors, including political pressures. In Bangladesh, NBFIs operate in a complex and challenging regulatory environment and as a result, the sector has largely been suffering a lot owing to undue political influence and corruption as well.
Politicians and influential individuals often exert their respective pressures on the NBFIs just to grant loans for their favored clients who are not creditworthy. And this is the cause that contributed to the default by some customers and creates financial instability in many NBFIs.
Besides, politicians allegedly exercise their power even to interfere with regulatory enforcement and oversight, creating an environment that is conducive to corruption and mismanagement in NBFIs.
Additionally, the lack of transparency and accountability in this sector, has also contributed further to its vulnerability to the undue political pressures or influences. This has resulted in the erosion of public trust and confidence in the financial sector, which has further undermined the stability of NBFIs.
Though political pressures have definitely played a negative role in the failure of NBFIs in Bangladesh, but it is not the sole factor to be blamed. Of course, there are some other factors such as poor governance, mismanagement, and lack of regulatory oversights that altogether contributed to this sector’s instability.
Financial sector is constantly changing
In Bangladesh, both Non-Banking Financial Institutions (NBFIs) and traditional banks provide various financial services such as loan disbursement, deposit mobilization, and remittances. The main difference is that NBFIs are not allowed to accept deposits like commercial banks, but they are permitted to mobilize savings through instruments such as savings certificates, bonds and prize bonds.
Overlapping of functions between NBFIs and banks can lead to increased competition, which can be beneficial in terms of promoting efficiency and innovation in the financial sector. However, it can also pose risks such as potential market saturation, leading to a decline in profitability, and creating challenges for regulators in terms of supervising and regulating both NBFIs and banks.
To address these challenges, the central bank of Bangladesh has taken some steps to strengthen the regulatory framework for NBFIs, including issuing guidelines for the issuance of savings certificates, and increasing its supervision and monitoring activities.
Bangladesh Bank has also undertaken steps to promote financial inclusion by encouraging NBFIs to expand their reach and services in underserved areas.
Additionally, NBFIs are encouraged to adopt sound corporate governance practices and to maintain adequate levels of capital and reserves to ensure their stability and resilience.
NBFIs and banks often operate in the same niche market, but they differ in the way they generate revenue. While banks make money from the spread between the interest they charge on loans and the interest they pay on deposits, NBFIs generate revenue by charging a fee for their services.
NBFIs may also take loans from banks and then provide loans to the clients of the same banks, but they would not be making a profit from the spread between the interest charged and the interest paid, as that would be the domain of the banks. Instead, NBFIs would be able to make a profit by charging a fee for the service of loan origination, underwriting, and servicing. The fee charged by the NBFIs would depend on the risk associated with the loan and the services they provide.
The ideal scenario would be for NBFIs and banks to complement each other and work together to meet the credit needs of the market. NBFIs could provide specialized services and reach segments of the market that banks may not be able to serve effectively. At the same time, banks could provide a stable source of funding for NBFIs and also offer a range of products and services that NBFIs may not be able to provide. By working together, NBFIs and banks could create a more efficient financial system that better serves the needs of the market.
It’s true that some non-bank financial institutions (NBFIs) in Bangladesh have faced some difficulties including bankruptcy like situation. The non-banking financial sector in Bangladesh has experienced significant growth in recent years, but some companies have struggled a lot due to mismanagement, lack of proper regulatory oversight and a weak legal framework for debt recovery.
In some cases, NBFIs have faced liquidity crisis and also unable to meet the demands of their depositors. This has led to a loss of public trust and confidence in the sector and it is a must to ensure increased regulation and supervision to ensure the stability and safety of the financial system by regaining the public trust and confidence.
It’s important to note that not all NBFIs in Bangladesh are facing the same difficulties while many are also operating successfully and serving the needs of the country’s financial system. However, it’s critical that the government and regulatory authorities take steps to address the challenges facing this sector and to ensure the stability and safety of the financial system for the benefit of all.
In Bangladesh, there are several non-bank financial institutions (NBFIs) that are considered to be successful ones and are operating effectively. Among them, Delta, Brac, Housing Finance Corporation Ltd, LankaBangla Finance Limited, BD Finance Ltd, Reliance Finance Limited, IDLC Finance Limited and IDLC Finance Limited are the leading non-bank financial institutions in Bangladesh, providing a range of financial services including leasing, trade finance, and working capital financing.
These are just a few examples of successful NBFIs in Bangladesh. It’s important to note that the financial services sector in Bangladesh is constantly evolving, and the success of NBFIs can be influenced by many factors such as market conditions, regulatory environment, and the quality of management and operations.
These institutions have already gained a reputation by providing quality financial services to their customers and have been operating effectively in the market.
To improve the overall health of the Non-Banking Financial Institutions (NBFIs) in Bangladesh, the political power, Bangladesh Bank, and the management of NBFIs may abide by the following steps:
Bangladesh Bank should increase its supervision over NBFIs and enforce strict regulations to ensure their financial stability and to prevent any fraudulent activities. NBFIs should improve their risk management practices, including regular stress testing and credit risk assessment, to identify potential financial risks and take appropriate measures to mitigate all these risks.
The management of NBFIs should ensure good governance practices and improve transparency in their respective operations, which eventually would help to build trust with customers and regulators. The political power and Bangladesh Bank should take steps to raise awareness about the importance of financial literacy and encourage people to use formal financial services. This would help to increase the reach of NBFIs and improve their financial sustainability. NBFIs should also adopt digital technologies and digital financial services to improve their efficiency and to each more customers, particularly in rural areas.
In conclusion, only by working hand to hand, the political power, Bangladesh Bank, and the management of NBFIs can help improve the health of the NBFIs and strengthen the overall financial sector in Bangladesh.
Mohammad Abdul Karim is Vice President of Social Islami Bank Ltd.
