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 (Barai et al. 1999). 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. Of these, one is government owned, 15 are local (private) and the other 13 are established under joint venture with foreign participation.
1.1 Recent Development & 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- 1.1. It can also be seen from the figure that the portfolio mix of NBFIs has become quite stable from 2004.
NBFIs offer services to various sectors such as textile, chemicals, services, pharmaceuticals, transport, food and beverage, leather products, construction and engineering etc. The percentage of the sector wise distribution of NBFIs investment in 2005 is given in Figure- 1.2. Although an individual NBFI may have a different portfolio as per its business strategy, the aggregated data shows that NBFIs mainly focus on real estate & housing (13%), power & energy (12%), textile (11%) and transport sector (9%). Service (finance and business) is another area of importance for NBFIs. From the perspective off broad economic sectors, investment in the industrial sector (42%) dominated that in the service sector (33%) in 2005. NBFIs are also exploring other sectors namely ‘pharmaceuticals & chemicals’, ‘iron, steel & engineering’, ‘garments & accessories’, ‘food & beverage’ and ‘agro industries & equipment’. The weight of these sectors is 23 percent of the total portfolio.
Sector wise distribution of outstanding investment of NBFI
The contribution of NBFIs’ financing activities (lease, loan, housing, investment etc.) to the overall economy persistently increased over the years as can be seen in Figure -1.3. In 2001, the share of NBFIs’ financing to total GDP had been only 0.84 percent, which was more than doubled within 5 years and became 1.83
percent in 2005. The comparative figures for the banking sector were 34.55 and 41.32 percent in 2001 and 2005, respectively. The average yearly growth of NBFIs’ contribution to GDP was about 22 percent during this period as compared to 4.7 percent of that by the banking sector. Even in the regional...