Non Bank Financial Institutions (FIs):

Non-bank financial institutions (NBFIs) represent one of the most important parts of a financial
system. Non Bank Financial Institutions (FIs) are those types of financial institutions which are
regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank. Now, 34 FIs
are operating in Bangladesh while the maiden one was established in 1981 (IPDC). Out of the
total, 2 is fully government owned, 1 is the subsidiary of a SOCB, 16 were initiated by private
domestic initiative and 15 were initiated by joint venture initiative. Major sources of funds of FIs
are Term Deposit (at least three months tenure), Credit Facility from Banks and other FIs, Call
Money as well as Bond and Securitization.

Bangladesh Bank issues licence and supervises NBFIs under the Financial Institution Act, 1993.
At present, the minimum paid up capital for NBFIs is Taka 1.0 billion as per the Financial
Institution Regulation, 1994. NBFIs' business line is narrow in comparison with Banks in
Bangladesh. NBFIs have been allowed to offer term deposit service for tenure of at least three
months effective from 2 December 2013.
The major difference between banks and FIs are as follows:
 FIs cannot issue cheques, pay-orders or demand drafts.
 FIs cannot receive demand deposits,
 FIs cannot be involved in foreign exchange financing,
 FIs can conduct their business operations with diversified financing modes like
syndicated financing, bridge financing, lease financing, securitization instruments, private
placement of equity etc.

Sources of Fund:

The prime sources of NBFIs finance are loan from the other commercial banks, term deposits
from the public, fund from capital market by issuing shares, debentures, bonds etc. and loan
facilities from the international agencies like ADB, IDA, IFC etc

Product & Services of NBFIs:

Finance/ Capital Lease

Provide a long-term solution that allows customers to free up working capital

  Operational Lease:

An operational lease entails the client renting an asset over a time period that is substantially less
than the asset’s economic life. It offers short-term flexibility, which may allow the customer to
take advantage of off-balance sheet accounting treatment
Hire Purchase

A hire purchase is an alternative to a lending transaction for the equipment purchase. It is usually
employed for retail or individual financing of smaller items, such as consumer products.
However, hire purchase option is also suitable for business houses depending on tax practices.

  Leveraged Leases

Leases generally for large transactions involving three parties: a lessee, a lesser and a funding
source. These leases infuse third-party non-recourse debt underwritten by the customer’s ability
to raise capital in the public and private capital markets for a significant portion of the cost.

Synthetic Leases

Synthetic lease structure is generally provided for property that retains value over an extended
period of time such as aircraft, railroad rolling stock, manufacturing equipment and certain types
of real-estate

Home Loan and Real Estate Financing

House loan and real estate financing is extended for purchase of apartment and house,
construction of residential house, purchase of chamber and office space for professionals,
purchase of office space and display center, purchase and construction of commercial building,
real estate developer for construction of apartment project. Mostly mid to long-term in nature

Short Term Loans

Factoring of Accounts Receivables Financing against invoices raised by the supplier after
making the delivery successfully. Major Features are Revolving Short Term Facility, Permanent
Assignment of Payment, Financing against invoices, Post-delivery Financing

Corporate Finance

Bridge Finance: Bridge Finance is a kind of Short Term Finance extended in anticipation of
immediate long term financing such as public issue, private placement, loan syndication, lease
syndication, loan, lease & debentured Finance

Syndication: Syndication of Large Loans Making available a large financing for a corporate
client. Arrange syndicated financing in the mode of loan, lease, equity, working capital, or any
combination thereof. Particularly useful for large projects requiring large scale investment and
no single financier wants to take the whole risk. Example: Greenfield project.
Merger and Acquisition : Merger and Acquisition help find appropriate organization for best
possible synergy, conduct valuation of companies and select suitable merger and acquisition
methods, negotiate and execute deal beneficial for all the parties involved

Merchant Banking

  The Issue Management group is capable of devising innovative solution for raising capital –
debt e.g. placement of bonds and debentures, and raising equity through private and public
placement – from the market suiting the unique needs and constraints of the corporate clients.

  Underwriting refers to the guarantee by the underwriters that in the event of under-
subscription, the underwriter will take up the under-subscribed amount on pro-rata basis upon
payment of price of that option

  Portfolio Management Merchant banks allow small investors to open investor account with
merchant banks and provide support for the purchase and sales of shares . Clients shall have
absolute discretionary power to make investment decisions.

Securities Services

  Brokerage Services Provide services for Trade Execution (Dhaka and Chittagong Stock
Exchanges), Pre -IPO private placement, Asset allocation advice, Opportunities for trading in
different financial instruments

  CDBL Services as full service Depository Participant (DP)

Apart from the brokerage services, securities services also provide the services like BO
(Beneficial Owner)accounts opening and maintenance, Dematerialization ,Re-materialization,
Transfers and multiple accounts movement, Lending and borrowing etc.

Financial Performance of NBFIs:

Assets:
The asset of NBFIs went up substantially by 17.5 percent to 611.0 billion in 2015 from Taka
520.1 billion in 2014. At the end of June 2016, assets of NBFIs increased to Taka 672.8 billion.
NBFIs deploy funds for providing mainly term loan in different sectors of the economy with
major concentration in industrial sector. Sector wise composition of NBFIs' investment at the
end of June 2016 was as follows: industry 43.0 percent, real estate 16.6 percent, margin loan 3.6
percent, trade and commerce 17.7 percent, merchant banking 3.9 percent, agriculture 1.9 percent
and others 13.3 percent.

Deposits:
Total deposits of the NBFIs in 2015 rose to Taka 318.1 billion (62.5 percent of total liabilities)
from Taka 238.5 billion (56.2 percent of total liabilities) in 2014 showing an overall increase of
33.4 percent. At the end of June 2016, total deposit of NBFIs increased
to Taka 351.4 billion.
Capital Market Investment:
NBFIs are allowed to invest in the capital market to the extent mentioned in the Financial
Institutions Act, 1993. In 2015, all NBFIs' total investment in capital market was Taka 19.4
billion compared to Taka 18.4 billion in December 2014. Investment in capital market
accounted for 3.2 percent of the total assets of all NBFIs. At the end of
June 2016, NBFIs total investment in capital market stood at Taka 21.1 billion.

NPL:
The ratio of gross nonperforming loan /lease to total loan/lease is used to judge the asset quality
of NBFIs. At the end of June 2016, the NPL ratio for NBFIs was 9.0 percent. In the total asset
composition of all NBFIs, the concentration of loans, lease and advances was 74.2 percent. At
the end of June 2016, out of 33 NBFIs, 1 was evaluated as "1 or Strong", 7 were "2 or
Satisfactory", 14 were "3 or Fair", 9 were "4 or Marginal" and 1 was "5 or Unsatisfactory" in the
asset quality component of the CAMELS rating matrix (the
remaining one NBFI is yet to come into rating)

Cost of Fund:

NBFIs are regularly submitting their monthly statements of base rate and cost of funds to BB as
per guideline published in 2013. On the basis of these statements, BB prepares an aggregate cost
of funds index, uploads that in the BB website and updates it in its website on a monthly basis. It
can be mentioned that base rate is the minimum interest rate below which it is not viable for an
NBFI to lend in the market. As there was no specific guideline before December 2013, the
NBFIs calculated the interest rate in different ways from their own perspective. Some NBFIs
provided loan using floating interest rate. In that case, they imposed the rate based on the
deviation among their own cost of funds. As a result, their efficiency or inefficiency to manage
the liquidity directly affected the clients. The cost of funds index is used as an acceptable
reference rate. The base rate system facilitates the interest rate determining process and ensures
more transparency and accountability in the NBFIs. Base Rate System is used in different
countries including India, Nepal and Bhutan.
In Bangladesh, the base rate system with cost of funds index has been initiated for the first
time.
Challenging Issues for NBFIs

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.

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. Therefore, NBFIs
have to explore alternative ways for raising funds. Information about the asset-liability
mismatch scenario

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 exposé 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 3billion 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 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 NBFI 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 then on-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.
 Insurance Companies:

History of Bangladesh Insurance Business.

Insurance Business in Bangladesh is one of the common phenomenon traditional businesses.

This business has a long history. Insurance business in Bangladesh started almost century
back for the during the British regime in India, some insurance companies began business
operation, both life and general. 

Bangladesh Insurance business increased for the duration of 1947-1971, when there are 49
insurance companies operate their business both life and general insurance. In that time Twenty
seven Insurance company head office in Bangladesh former West Pakistan and Ten Insurance
company head office in East Pakistan.

After liberation war in 1972 The People's Republic Government of Bangladesh nationalized the
insurance industry along with the banks in 1972 by Presidential Order No. 95. By virtue of this
order, all insurance company  in Bangladesh operate they are businesses under this
nationalization order. This was observed by formation of 5 insurance companies in the life and
non-life sector. Further changes were added on 14th May,1973. These Five Insurance Company
insurance corporations were given below-

 Jatiya Bima Corporation.

 Tista Bima Corporation.
 Karnafuli Bima Corporation.
 Rupsa Jiban Bima Corporation.
 Surma Jiban Bima Corporation.

Through the enactment of Insurance Corporation Act VI, 1973 which led to creation of two
corporations namely Sadharan Bima Corporation for general insurance and, Jiban Bima
Corporation for life insurance in Bangladesh. In other words Sadharan Bima Corporation (SBC)
emerged on 14th May, 1973 under the Insurance Corporation Act (Act. No. VI) of 1973 as the
only state owned organization to deal with all classes of general insurance & re-insurance
business emanating in Bangladesh. Thereafter SBC was acting as the sole insurer of General
Insurance till 1984. Bangladesh Government allowed the private sector to conduct business in all
areas of insurance for the first time in 1984. The private sector availed the opportunity promptly
and came forward to establish private insurance companies through promulgation of the
Insurance Corporations (Amendment) Ordinance (LI of 1984) 1984.
The Insurance Market in Bangladesh now consists of two state-owned corporations, forty five
and thirty private sector general & life insurance companies respectively, a total of 77 Insurance
Companies.
Growth in insurance coverage is strongly associated with rising incomes, the development of an
increasingly sophisticated banking sector, and low or moderate levels of inflation. The strong
contribution of rising incomes to greater insurance coverage might be attributable to demand
factors (rising demand for coverage as individuals become wealthier), supply factors (it becomes
more cost-effective to provide insurance as the economy expands, providing both a stronger
institutional environment and greater returns relative to transactions cost), or a combination.
The overall institutional environment plays an important role, in terms of political stability and
openness as well as government effectiveness, rule of law, and control of corruption. Religious
factors also play a role, with insurance consumption inversely correlated to the share of the
population that is Islamic.

Types of Insurance:

Marine Insurance:

Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or
cargo by which property is transferred, acquired, or held between the points of origin and final
destination.

Marine is the oldest form of insurance and came first in the list. This type of insurance
probably began in northern Italy sometime during the 12 th and 13th century and gradually the
concept was rather transferred to or taken over by the United Kingdom. During the
13 th & 14 th century the Italian merchants went to UK and along with the merchandise
carried with them the trading customs including the concept of marine insurance.
Marine insurance as such was not being  practiced as a separate specialized entity during
that time since it were the merchants who used to transact marine insurance business side by side
with their general trading activities.

Fire insurance:
Fire insurance covers damage or loss to a property because of fire. It is a specific form of
insurance in addition to homeowner's or property insurance, and it covers the cost of replacement
and repair or reconstruction above what the property insurance policy covers

After marine insurance fire insurance developed in present form. I t h a d b e e n o r i g i n a t e d i n

G e r m a n y i n t h e  beginning of sixteenth century. The fire insurance got momentum in England
after the great fire in 1666 when the fire losses were tremendous.
Life Insurance:

Life insurance is a protection against financial loss that would result from the premature death of
an insured. The named beneficiary receives the proceeds and is thereby safeguarded from the
financial impact of the death of the insured. The death benefit is paid by a life insurer in
consideration for premium payments made by the insured.

The third in the list of development is the life insurance business. The earliest policy
of which there is a record dates back to1583. During this period only short term
polices were used be issued meaning that only at the death of the life assured during the term
period the money was to be paid. But survival nothing was payable. In 1693 Halley introduced
the mortality table giving a d e f i n i t e v a l u e t o r i s k o f d e a t h . I n 1 9 7 4 , t h e l i f e
" a s s u r a n c e " a c t w a s p a s s e d i n t h e B r i t i s h  parliament requiring the presence of
insurable interest before one could effect a life policy on the life of another. All these gradually
gave life assurance a sound, systematic and scientific basis as we see in the present day

Contribution of Insurance Business in the National Development In Bangladesh

Formation of capital & increase of investment:

Insurance companies received premiums from insured persons. These premiums increase
national capitals. By investing these capitals, national productions increase.

Reduce of hindrance of risk:

Every sorts of business consists of risks. These risks are more hazardous in Bangladesh. Non
Life Insurance companies minimize these risks by giving privileges on loss.

Distribution of risks:
Insurance companies deal with lots of insured people and properties. So risks are being
distributed among them to their re-insurer.

Extension of business:
By taking all uncertain business risk insurance companies extended the field of business in our
country. Insurance gives the assurance of indemnity and help to collect the capital to lunch a new
business and expand the existing business.

Provide safety and security:

Insurance provide financial support and reduce uncertainties in business and human life. It
provides safety and security against particular event. There is always a fear of sudden loss.
Insurance provides a cover against any sudden loss. For example, in case of life insurance
financial assistance is provided to the family of the insured on his death, as a token of death or
accidental claim.
Generates financial resources:

Insurance generate funds by collecting premium. These funds are invested in government
securities and stock. These funds are gainfully employed in industrial development of a country
for generating more funds.

Life Insurance encourages savings:

Insurance does not only protect against risks and uncertainties, but also provides an investment
channel too. Life insurance enables systematic savings due to payment of regular premium. Life
insurance provides a mode of investment. It develops a habit of savings money by paying
premium.

General Insurance claims payments to continue business:

By paying claim General Insurance help the business man to start his business in full sweing by
covering loss and also to help bank to protect liquidity for the clients business loss or bed debt of
loan paid to the clients who have suffered loss.

Promotes economic growth:

Insurance generates significant impact on the economy by mobilizing domestic savings.
Insurance turn accumulated capital into productive investments.

Medical support:

A medical insurance considered essential in managing risk in health. Anyone be a victim of

critical illness unexpectedly. And rising medical expense is of great concern. The insured gets a
medical support in case of medical insurance policy.

Spreading of risk:

Insurance facilitates spreading of risk from the insured to the insurer. The basic principle of
insurance is to spread risk among a large number of people. A large number of persons get
insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated out
of funds of the insurer.

Increase of awareness:
As the maximum people of our country are illiterate so they have not much knowledge about the
future life and what will do to enhance the living standard. Different types of advertisement,
publicity and others awareness activities of insurance company which helps to increase the
awareness of general people.
Human resources development for insurance industry:

To develop the human resource for the insurance industry in Bangladesh. BIA has arranged
professional training others private institution also provide training programs for business
development & technique for reducing losses for the officers of the private insurance companies
operating in Bangladesh.

Paying Taxes:
Insurance companies and their employees pay taxes, which fund government programs that help
needy people, contribute to education, protect the country, and maintain and expand the
infrastructure.

Contribute specialized expertise:

Insurers also contribute specialized expertise in the identification and measurement of risk. This
expertise enables them to accept carefully specified risks at lower prices than non-specialists. As
a result, the insurance market generates price signals to the entire economy, helping to allocate
resources to more productive uses.

Incentive to control losses:

Insurers also have an incentive to control losses, which is a significant social benefit. By offering
discounts to seat belts, smoke detectors, or other measures that reduce the frequency or severity
of losses, they lower their eventual claims costs, in the process saving lives and reducing injuries.

Invest long term Government Projects:

Now a days for the requirement of development economic, insurance company can invest their
ideal funds for long term to the Government Projects like Padma Bridage, Fly Over, Airways
Runway, Airways Terminals, River & Sea Port etc. If Government Agencies give assurance of
timely return of their investment benefits.