Non banking financial institutions are companies that do not accept deposits or handle accounts like traditional banks but pro

Performance of Non-Banking Financial Institute (NBFI) in Bangladesh

MBA Thesis

Md. Al Amin

ID # 09515019

A Thesis submitted in partial fulfillment of the requirements of the degree of

MASTER OF BUSINESS ADMINISTRATION

Of

University of Information Technology and Sciences

(UITS)

July ,2011

CERTIFICATE OF THE SUPERVISOR

This is to certify that the thesis on Performance of Non-Banking Financial Institute (NBFI) in Bangladesh is done by Md. Al Amin as a partial fulfillment of requirement of Master of Business Administration degree from

(UITS) University.The thesis has been carried out under my guidance and is a record of the bonafide work carried out successfully.Signature: ..

Supervisors full name: Mr. Nazmul hasan, Head of MBA programme

Department of Business Administration

Date: .

Faculty/School: IBAIS University

University of Information Technology and Sciences

(UITS)

DECLARATION

I hereby do solemnly declare that the work presented in this dissertation / project

/ thesis has been carried out by me and has not been previously submitted to

any other University/College/Organization for an academic qualification /

certificate / diploma or degree.The work I have presented does not breach copyright.

I further undertake to indemnify the university against any loss or damage arising

from breach of the foregoing obligations.

Signature:

Students full name: Md. Al Amin , Student ID # 09515019Date: .......................................................................................................................

Faculty/School: (UITS), University

ACKNOWLEDGEMENTS

I wish to express my special gratitude and humble thanks to my Supervisor Mr. Nazmul hasan, Head of MBA Programme, Department of Business Administration for his proper guidelines, valuable knowledge and experiences, caring attitude and critical feedback which helped me throughout this work. His opinions were useful in refining some of my thoughts on thesis. Without his help it would have been very difficult to accomplish this task. Above all I would like to thanks the All Mighty Allah who have blessed me with strength so that I can be prepared for any though situation I might face in the course of my journey towards light.

Md. Al Amin, ID # 09515019

University of Information Technology and Sciences,(UITS)

Abstract

Core financial services provided by financial intermediaries include payments and liquidity, maturity transformation, store of value, information processing and pooling of risks. Banks have traditionally provided most of these services and are increasingly diversifying into other areas. However, banks typically have an edge

in providing payment and liquidity related services and they usually select a portfolio mix with an overriding objective of providing a certain return. Non-banking financial institutions (NBFIs), on the other hand, tend to offer enhanced equity and risk based products. NBFIs play a crucial role in broadening access to financial services, enhancing competition and diversification of the financial sector. They are increasingly being recognized as complementary to the banking system capable of absorbing shocks and spreading risks at times of financial distress.Traditionally our banking financial institutions are involved in term lending activities, which are mostly unfamiliar products for them. Inefficiency of BFIs in long-term loan management has already leaded an enormous volume of outstanding loan in our country. At this backdrop, in order to ensure flow of term loans and to meet the credit gap, NBFIs have immense importance in the economy. In addition, non-bank financial sector is important to increase the mobilization of term savings and for the sake of providing support services to the capital market. The purpose of this paper is to highlight different features of NBFIs, their contribution to the overall economy and the product base of NBFIs. The paper also describes the performance of NBFIs as measured by different financial indicators, along with the effects of banks entry into the non-bank financing area. Special emphasis has been given to identify the challenges faced by NBFIs in Bangladesh. And finally, development of NBFIs as well as their role in strengthening the financial system of Bangladesh has been discussed. Table of contents

This project is summarized into seven different chapters. Page No.Chapter-1

07-12

Introduction, Objectives of the study, Research methodology, Research design, Research approach and limitations of the study.Chapter -2

13-15Banking and Non Banking Financial Institutions Basic Differences

Chapter -3

16-28Financial system of BangladeshChapter -4

29-36Emergence of Non-Bank Financial Institutions in Bangladesh

Chapter-5

37-69

NBFIs profile and activities in BangladeshChapter-6

70-73Findings of the study

Chapter-7

74-77Recommendations and conclusion

Bibliography

Appendix

CHAPTER IINTRODUCTION

Non-banking financial institutions (NBFIs) are an important part of the Bangladesh financial system. A wide range of financial institutions (FIs) have evolved in the Bangladesh financial system over the years, with a view to providing medium to long-term finance to different sectors of the economy. The NBFIs at present consist of a heterogenous group of institutions, catering to a wide range of financial requirements. The major intermediaries that are included in the NBFI group are development finance institutions (DFIs) (which are mostly Government-owned and have been the traditional providers of long-term project loans), insurance companies, non-banking financial companies (NBFCs), primary dealers (PDs) and capital market intermediaries such as mutual funds.

The role and importance of non-bank financial intermediaries is clear from the various functions performed by these institutions. Major functions of the NBFIs are as follows:1. Financial Intermediation:The most important function of the non-bank financial intermediaries is the transfer of funds from the savers to the investors.Financial intermediation is economical and less expensive to both small businesses and small savers,(a) It provides funds to small businesses for which it is difficult to sell stocks and bonds because of high transaction costs,(b) It also benefits the small savers by pooling their funds and diversifying their investments.2. Economic Basis of Financial Intermediation:Handling of funds by financial intermediaries is more economical and more efficient than that by the individual wealth owners because of the fact that financial intermediation is based on(a) the law of large numbers, and(b) economies of scale in portfolio management.(i) Law of Large Numbers:

Financial intermediaries operate on the basis of the statistical law of large numbers. According to this law not all the creditors will withdraw their funds from these institutions. Moreover, if some creditors are withdrawing cash, some others may be depositing cash. Again, the financial intermediaries also receive regular interest payments on loans or investments made by them. All these factors enable the financial intermediaries to keep in cash only a small fraction of the funds provided by the creditors and lend or invest the rest.

(ii) Economies of Scale:

Large size of the asset portfolios enables the financial intermediaries to reap various economies of scale in portfolio management. The main economies are:(a) reduction of risk through portfolio diversification:(b)employment of efficient and professional managers; and(c) low administrative cost of large loans and(d) low costs of establishment, information and transactions.3. Inducement to Save:

Non-bank financial intermediaries play an important role in promoting savings in the country. Savers need stores of value to hold their savings in. These institutions provide a wide range of financial assets as store of value and make available expert financial services to the savers. As stores of value, the financial assets have certain special advantages over the tangible assets (such as, physical capital, inventories of goods, etc.). They are easily storable, more liquid, more easily divisible, and less risky. In fact, saving- income ratio is positively related to both financial institutions and financial assets; financial progress . induces larger savings out of the same level of real income.4. Mobilization of Saving:Mobilization of savings takes place when the savers hold savings in the form of currency, bank deposits, post office savings deposits, life insurance policies, bills, bond's equity shares, etc. NBFI provides highly efficient mechanism for mobilising savings. There are two types of NBFIs involved in the mobilisation of savings;(a) Depository Intermediaries, such as savings and loan associations, credit unions, mutual saving banks etc. These institutions mobilise small savings and provide high liquidity of funds.(b) Contractual Intermediaries, such as life insurance companies, public provident funds, pension funds, etc. These institutions enter into contract with savers and provide them various types of benefits over the long periods.5. Investment of Funds:The main objective of NBFIs is to earn profits by investing the mobilised savings. For this purpose, these institutions follow different investment policies. For example, savings and loan associations, mutual saving banks invest in mortgages, while insurance companies invest in bonds and securities.We also put insight into the problems and future prospects of NBFIs. In this paper an attempt has been made to highlight different features of NBFIs to identify their importance in financial system of Bangladesh. However, other aspects like product innovation, development pace, new area of venture, initiatives taken by government and Bangladesh Bank for the development of NBFIs, and comparison with world situation have been discussed in different places. These issues are mainly concerned with the development of NBFIs as well as their role in strengthening financial system of Bangladesh. 1.1 Objective of the study

The objective of the study is as follows To highlight the necessity and importance of NBFIs along with BFIs to strengthen the financial system of overall economic development of the country. To put insight into the problems and future prospects of NBFIs. In this paper an attempt has been made to highlight different features of NBFIs to identify their importance in financial system of Bangladesh. Special emphasis has been given to the complementary role of NBFIs with BFIs for efficiency of financial system, contribution in term lending with special discussion on leasing, role in capital market development, problems in availability of fund, impact of NBFIs Deposit Mobilization on the Monetary Policy etc.1.2 Research Methodology

Research methodology is the systematic way to solve the research problem. It gives an idea about various steps adopted by the researcher in a systematic manner with an objective to determine various manners.

To fulfill the objectives of this research, the study will be undertaken to analyze the necessity and importance of NBFIs along with BFIs to strengthen the financial system of overall economic development of the country by collecting Primary as well as Secondary data which will be used to collect information on the area for the study.

1.3.1 Research Design

A research design is considered as the framework or plan for a study that guides as well as helps the data collection and analysis of data. The research design may be exploratory, descriptive and experimental for the present study. The descriptive research design is adopted for this project. 1.3.2 Research Approach

The research worker contacted the respondents personally with well-prepared sequentially arranged questions. The questionnaire is prepared on the basis of objectives of the study. Direct contract is used for survey, i.e., contacting employees directly in order to collect data.

1.3.3 Collection of Data

Most of the data collected by the researcher is primary data through personal interview, where the researcher and the respondent operate face to face.

1.3.4 Analysis of Data

The data are collected through survey and books, reports, newspapers and internet etc., the survey conducted among the employees of Bangladesh bank, Different NBFI offices. The data collected by the researcher are tabulated and analyzed in such a way to make interpretations.

Various steps, which are required to fulfill the purpose, i.e., editing, coding, and tabulating. Editing refers to separate, correct and modify the collected data. Coding refers to assigning number or other symbols to each answer for placing them in categories to prepare data for tabulation refers to bring together the similar data in rows and columns and totaling them in an accurate and meaningful manner. The collected data are analyzed and interrupted using statistical tools and techniques.1.4 Research period

The research period of the study has from ---------- to --------- having ---- weeks of duration.1.5 Limitations of the study

This paper studies the activities of the NBFIs on the basis of the secondary data obtained from different sources like NBFIs, Bangladesh Bank, World Bank, Ministry of Finance, daily news papers, etc. We have faced difficulties in analyzing data due to inconsistency and insufficiency. Hence 100% accuracy cant be assured. The researcher was carried out in a short span of time, where in the researcher could not widen the study.

The study could not be generalized due to the fact that researcher adapted personal interview method. CHAPTER II

Banking and Non Banking Financial Institutions Basic Differences

In Bangladesh now different commercial banks and the non banking financial organizations are operating there business. And every organization now involved attracting the retail customers that means the middle income group people of the country. To draw their attention the sells persons of different organization try to knock every possible door. These activities of different organization increase the interest about this sector. As both commercial banks and the non financial institutes are in the market, so it makes confusion to the general people about the activities of these organizations.

Banks, usually a corporation, that accepts deposits, makes loans, pays checks, and performs related services for the public. The Bank Holding Company Act of 1956 defines a bank as any depository financial institution that accepts checking accounts (checks) or makes commercial loans, and its deposits are insured by a federal deposit insurance agency. A bank acts as a middleman between suppliers of funds and users of funds, substituting its own credit judgment for that of the ultimate suppliers of funds, collecting those funds from three sources: checking accounts, savings, and time deposits; short-term borrowings from other banks; and equity capital. A bank earns money by reinvesting these funds in longer-term assets. A Commercial Bank invests funds gathered from depositors and other sources principally in loans. An investment bank manages securities for clients and for its own trading account. In making loans, a bank assumes both Interest rate risk and credit risk.

The commercial banks are described now a day by many agents of economic development and social change. Their functions and roll are undergoing revolutionary changes client coverage and extended beyond imagination.

While many people believe that banks play only narrow roll in the economy taking deposit and making loans the modern banks has bad to adopt new roles to remain competitive and responsive to public needs. Bakings principal roles today are as follows:The intermediary role:

Transforming saving received primarily from household into credit for business firm and others in order to make investment in new building, equipment and other goods.

The payment role:

Carrying out payment for goods and services on behalf of their customers.

The generator role:

Standing behind their customers to pay off customer debts, when those customers are unable to pay.

The risk management role:

Assisting customer in preparing financially for the risk of lost to property and persons.

The saving / investment advisers role:

Aiding customers in fulfilling their long rang goals for a better life by building, managing, and protecting savings.

The safekeeping/certification of value role:

Safeguarding a customers valuables and appraising and certifying their true market

The agency role:

Acting on behalf of customers to manage and protect their property or issue and redeem their securities.

The policy role:

Saving as a conduit for govt. policy in attempting to regulate the growth of the economy and pursue social goals.

Non-bank financial institutions represent one of the most important parts of a financial system. In Bangladesh, NBFIs are new in the financial system as compared to banking financial institutions (BFIs). A total of 29 NBFIs are now working in the country. The NBFIs sector in Bangladesh consisting primarily of the development financial institutions, leasing enterprises, investment companies, merchant bankers etc. The financing modes of the NBFIs are long term in nature. Traditionally, our banking financial institutions are involved in term lending activities, which are mostly unfamiliar products for them. Inefficiency of BFIs in long-term loan management has already leaded an enormous volume of outstanding loan in our country. At this backdrop, in order to ensure flow of term loans and to meet the credit gap, NBFIs have immense importance in the economy. In addition, non-bank financial sector is important to increase the mobilization of term savings and for the sake of providing support services to the capital market.

The basic difference may include:-

A Bank is an organization that accepts customer cash deposits and then provides financial services like bank accounts, loans, share trading account, mutual funds, etc.A NBFC (Non Banking Financial Company) is an organization that does not accept customer cash deposits but provides all financial services except bank accounts.A bank interacts directly with customers while an NBFI interacts with banks and governmentsA bank indulges in a number of activities relating to finance with a range of customers, while an NBFI is mainly concerned with the term loan needs of large enterprisesA bank deals with both internal and international customers while an NBFI is mainly concerned with the finances of foreign companiesA bank's man interest is to help in business transactions and savings/investment activities while an NBFI's main interest is in the stabilization of the currency

Besides the differences between the both commercial banks and the non banking financial institutions they play both for the development of the economic structure of the country. If the both play positively than it can be said that, the development of the country is sure.

CHAPTER III

Financial system of Bangladesh

Overview

The financial sector in Bangladesh is continuously evolving towards a more modern and efficient system of financewhich is supportive of greater investment and inclusive economic growth. The financial system of Bangladesh consists of The Bangladesh Bank, scheduled banks, non-bank financial institutions, micro finance institutions, insurance companies, co-operative banks, credit rating agencies and stock exchange.Banking infrastructure

Type of bankNo.No. of branches

State owned43,391

Specialized41,365

Private302,387

Foreign958

Total477,201

An overview of financial sector in Bangladesh

Investment freedom

The Foreign Investment Act of 1980 guarantees the right of repatriation of invested capital, profits, capital gains, post-tax dividends, and approved royalties and fees. Foreign firms are able to repatriate funds without much difficulty, provided the appropriate documentation is in order.Economic freedom in BangladeshBangladeshs economic freedom score is 51.1, making its economy the 137th freest in the 2010 Index. Its overall score is 3.6 points higher than last year, mainly reflecting improvements in trade freedom and investment freedom. Bangladesh is ranked 29th out of 41 countries in the AsiaPacific region. Bangladesh has enjoyed impressive economic growth of around 6 percent per year over the past five years, driven mainly by its limited but growing services and industrial sectors

Source: Index of economic freedom 2010, The Heritage FoundationComparison on economic freedom in Asia Pacific regionName of the countryBusiness freedom (%)Trade freedom (%)Monetary freedom (%)Investment freedom (%)

Bangladesh59.45866.645

Cambodia39.97070.560

China49.772.270.620

India36.367.967.535

Indonesia53.177.970.835

Philippines48.177.872.740

Singapore98.29080.975

Sri Lanka71.862.256.815

Thailand70.775.966.440

Vietnam60.768.958.120

Country's score over time

Source: Index of economic freedom 2010, The Heritage FoundationTen economic freedoms of Bangladesh

Source: Index of economic freedom 2010, The Heritage FoundationShort 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.Bangladesh Bank (BB)

Bangladesh Bank has been working as the central bank since the country's independence. Its prime jobs include issuing of currency, maintaining foreign exchange reserve and providing transaction facilities of all public monetary matters. Bangladesh Bank is also responsible for planning the government's monetary policy and implementing it thereby. Bangladesh Bank, which is the designated central monetary authority of the People's Republic of Bangladesh, has a governing body comprising of nine members with the Governor as its chief. Apart from the head office in Dhaka, it has nine more branches, of which two in Dhaka and one each in Chittagong, Rajshahi, Khulna, Bogra, Sylhet, Rangpur and Barisal.

Source: Bangladesh BankScheduled Banks (SB)Out of 6,562 Scheduled Bank branches operating in the country, up to end December 2006 the nationalised commercial bank's operate 3,384 branches, of which 2,146 are in rural areas and 1,238 are in urban areas; Scheduled Banks have 1,354 branches of which 1,200 are in rural areas and 154 are in urban areas; Public Commercial Banks have 1,776 branches of which 488 are in rural areas and 1,288 are in urban areas.Source: Bangladesh BankCooperative Banks

In Bangladesh 119 cooperative banks are operating, of which 64 are central cooperative banks, 48 are land mortgage and the rest seven are other cooperative banks. The maximum share of total assets, 90%, is controlled by central cooperatives. Similarly the maximum share deposits (85%) and advances (90%) are handled by the same central cooperatives.Source: Bangladesh BankInvestment 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 programmers, 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.Source: Investment Corporation of Bangladesh

Securities and Exchange Commission (SEC)The Securities and Exchange Commission (SEC) was established on 8th June, 1993 under the Securities and Exchange Commission Act, 1993. The Chairman and Members of the Commission are appointed by the government and have overall responsibility to administer securities legislation. The Commission is a statutory body and attached to the Ministry of Finance.Source: Securities and Exchange Commission

Dhaka Stock Exchange (DSE)

Dhaka Stock Exchange (generally known as DSE) is the main stock exchange of Bangladesh. It is located in Motijheel- the heart of the Dhaka city and its central business district. It was incorporated in 1954. Dhaka Stock Exchange is the first stock exchange of the country. At the end of March 2010, the amount of all issued capitalize securities and debenture was $8,179m which is 23% greater than the value of June 2009 ($6,611m). During 30th June 2009, the price of all securities of Dhaka Stock Exchange was $18,951m, which has increased by 73% at the end of March 2010 where the value was $32,850m. The share indices of DSE increased by 85%, where the value was $434m on June 2009 and reached to $805m at the end of March 2010.Dhaka Stock Exchange is a public limited company. It is formed and managed under the Companies Act 1994, Security and Exchange Commission Act 1993, Security and Exchange Commission Regulation 1994, and Security Exchange (inside trading) regulation 1994. According to stock market rule, only members can participate in the floor and can buy shares for himself or his clients. At present it has 238 members.Source: Dhaka Stock Exchange

* As of March, 2010

1 crore Tk = 10 million

Source: Bangladesh Economic Review-2010 (Bangla version), Ministry of FinanceChittagong Stock Exchange (CSE)Chittagong Stock Exchange (generally known as CSE)-the first automated and modern trading bourse in the country. The Chittagong Stock Exchange began its journey in 10th October of 1995 from Chittagong city through the cry-out trading system with the promise to create a state-of-the art bourse in the country. Introduction of automated trading system in June 1998 replacing the practice and culture of age-old manual cry-out system of trading in the stock market of Bangladesh was a revolutionary step made by the Chittagong Stock Exchange in the history of the country's capital market. At the end of March 2010, issued capital increased by 29% compare to June 2009, reached to the amount of $2,539m. In addition, total market capital had a growth of 93% at March 2010, compare to June 2009, reached to the amountof $26,894m. Moreover, share index reached to 12,194 at the end of March 2010, with an increment of 54% compared to the index of June, 2009.

Source: Chittagong Stock Exchange

* As of March, 2010

1 crore Tk = 10 million

Source: Bangladesh Economic Review-2010 (Bangla version), Ministry of FinanceInvestment opportunities

Foreign investment or joint venture investment in the Export Processing Zones (EPZs) or outside EPZs (with the exception of the five industries mentioned earlier). Portfolio investment by purchasing shares in publicly listed companies through the stock exchange. Investment in infrastructure projects such as power generation (private power generation policy announced); oil, gas and mineral exploration, telecommunication, ports, roads and highways. Outright purchase or purchase of shares of state-owned enterprises, which are under process of privatization. Investment in private EPZ (Private EPZ Act recently passed). Legal security for investmentForeign Private Investment (Promotion and Protection) Act, 1980 ensures legal protection to foreign investment.

Bangladesh is a member of Multi-Lateral Investment Guarantee Agency (MIGA), Overseas Private Investment Corporation (OPIC) of USA and International Centre for Settlement of Industrial Disputes (ICSID)

Member of World Intellectual Property Organization (WIPO) and World Association of Investment Promotion Agencies (WAIPA).

Non-bank financial institutions (NBFI)

Non-bank financial institutions are an important part of financial system in Bangladesh, operations are regulated under the Financial Institutions Act, 1993. Presently, 30 NBFIs are running their businesses in the country and 21 of the non-bank financial institutions are listed with the countrys stock exchange. Bangladesh Bank has introduced a policy for loan and lease classification and provisioning for non-bank financial institutions from December 2000 on a half-yearly basis. OrganisationWeb link

Bangladesh Finance & Investment Co. Ltd.

Bangladesh Industrial Finance Company Limited (BIFC)http://www.bifcol.com

Bay Leasing & Investment Limited

Delta Brac Housing Finance Corporation Ltd. (DBH)http://www.deltabrac.com

Fareast Finance & Investment Limitedhttp://www.ffilbd.com

Fidelity Assets & Securities Company Ltd.http://www.fasbd.com

First Lease Finance & Investment Ltd.http://www.first-lease.com

GSP Finance Company (Bangladesh) Limited (GSPB)http://www.gspfinanceco.com

Hajj Finance Company Limitedhttp://www.amhajjfinance.com

IDLC Finance Limitedhttp://www.idlc.com

Industrial and Infrastructure Development Finance Company (IIDFC) Limitedhttp://www.iidfc.com

Industrial Promotion and Development Company of Bangladesh Limited(IPDC)http://www.ipdcbd.com

Infrastructure Development Company Limited (IDCOL)http://www.idcol.org

International Leasing and Financial Services Limited http://www.ilfsl.com

Islamic Finance and Investment Limitedhttp://www.ifilbd.com

LankaBangla Finance Ltd.http://www.lankabangla.com

MIDAS Financing Ltd. (MFL)http://www.midasfl.com

National Finance Ltd

National Housing Finance and Investments Limited

Oman Bangladesh Leasing & Finance Limited

People's Leasing and Financial Services Ltdhttp://www.plfsbd.com

Phoenix Finance and Investments Limitedhttp://www.phoenixleasing.com.bd

Premier Leasing & Finance Limited

Prime Finance & Investment Ltdhttp://www.primefinance.net

Saudi-Bangladesh Industrial & Agricultural Investment Company Limited (SABINCO)

The UAE-Bangladesh Investment Co. Ltd

Union Capital Limitedhttp://www.unicap-bd.com

United Leasing Company Limited (ULCL)http://www.ulc.com.bd

Uttara Finance and Investments Limitedhttp://www.uttarafinance.biz

InsuranceThe insurance sector is regulated by the Insurance Act, 1938 with regulatory oversight provided by the controller of insurance on authority under the Ministry of Commerce. A separate insurance regulatory authority is being established. A total of 62 insurance companies have been operating in Bangladesh, of which 18 provide life insurance and 44 are in the general insurance field. Among the life insurance companies, except the state-owned Jiban Bima Corporation foreign owned American Life Insurance Company, and the rest are private. Among the general insurance companies, state-owned Shadharan Bima Corporation is the most active in the insurance sector. A total of 31 insurance companies are listed in the capital market, of which eight offer life insurances.

Micro finance institutions (MFI)

Micro fiance institutions in Bangladesh were left unregulated for a long time since their inception. The government, with the close cooperation of Bangladesh Bank, undertook efforts to establish a regulatory framework which culminated in the enactment of the Micro credit Regulatory Authority Act, 2006. An executive board consisting of eight members is responsible for executing the general and administrative tasks of the management. The board consists of the Governor of Bangladesh Bank as ex-officio chairman, six government officials nominated by the government and one executive vice-president who serves as the member secretary of the board. The main responsibilities of the authority include issuance and cancellation of the license for micro credit, overseeing, supervising and facilitating the entire activities of micro finance institutions.

Recent developments in the financial sector

The stock market grew by 82% in 2009 compared to the year 2008, representinga 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.

Quick facts relating to the financial sector in Bangladesh Bangladesh has applied for membership of Egmont Group to operate its newly-established financial intelligence unit in line with international standard. Bangladesh Post Office is going to introduce postal cash card (e-money order) system through which people, across the country even in the remotest areas, will be able to send and receive money through mobile phone. The central bank has raised the ceiling of foreign currency for Bangladesh nationals allowing them to spend more while traveling abroad. The Bangladesh Bank launched the automation project of its Credit Information Bureau aiming at providing credit information in a faster and efficient way. Bangladesh Bank has once again lowered different banking charges, fees and commissions to provide assistance to businessmen hurt by falling exports. Economic data relating to the financial sector of BangladeshMoney and credit (bn* taka)

Money data2006-072007-082008-092009-10*

Money supply (narrow)501.68593.14664.27775.79

Money supply (broad)2,115.042,487.952.965.003,375.79

Scheduled banks time deposits1,613.361,894.812,300.732,600.00

Sector: Bangladesh Economic Review-2010 (Bangla version), Ministry of FinanceGovernment finance (bn* taka)

Data2006-072007-082008-092009-10

Revenue receipts494.72605.39691.80794.84

Revenue expenditure454.12569.89671.25769.38

Public sector development expenditure179.16243.16247.12308.27

Foreign exchange reserves (m US$)5,0776,1497,47110,117

Sector: Bangladesh Economic Review-2010 (Bangla version), Ministry of FinanceYearly interest rates (% per annum)End of periodBank rateCall money market's weighted average interest rates onSchedule bank's weighted average interest onSpread

borrowinglending depositsadvances

2010*5.003.513.51

20095.005.045.04

20085.0010.2710.277.3112.315.00

20075.009.319.316.7712.755.98

20065.007.177.176.9812.99

20055.008.418.415.9011.255.35

20045.004.935.745.5610.835.27

20035.006.888.176.2512.366.11

20026.009.499.566.4913.096.67

Bank deposits ($ m)Items February, 2010January, 2010February, 2009% changes of February, 2010 over

January, 2010February, 2009

Demand deposits*4,8854,7863,6552.0333.63

Time deposits*36,91936,09430,3982.2921.45

Total41,80440,88034,0542.2622.76

* Excludes inter bank and government deposits

m=million, bn=billion. Source: Statistics Department, Bangladesh Bank.

CHAPTER IV

Emergence of Non-Bank Financial Institutions in Bangladesh

The first non-bank financial institution (NBFI) was a fire insurance company established in 1680 in London. Although all financial institutions have a common basis for their operations and some role with respect to lender-borrower relationships, there are some fundamental differences between the banks and NBFIs. The liabilities created by the banks are unique in that these liabilities are themselves 'spendable' i.e., the deposits in banks are used as money by the holders of the deposits whereas the liabilities of a NBFI, such as a building society cannot be used in this way. Banks can actually increase the total volume of spending in the economy by their capacity to add to the stock of credit in existence. But the non-bank financial institutions do not have that capacity and they are merely 'honest brokers' and transmitting funds, which have been created elsewhere, eg, by the banking system. Banks now have less savings deposits and more demand deposits.

The NBFI, such as a leasing company, receives additional funds and is capable of adding to its mortgage lending by withdrawing from its larger demand deposits kept with the deposit money bank. The leasing company thus adds to the volume of credit and enables additional spending (on house purchase) to take place. The combination of financial assets created by the banks and NBFIs for ultimate lender varies depending on the origin of the asset.The operations of NBFIs in Bangladesh are regulated by the Bangladesh bank. The grant of authority to engage in borrowing from the general public is normally based on such factors as minimum capital requirement, quality of management, compliance with the concerned laws, rules, and regulations, and stability of financial standing. NBFIs may grant loans to their members and the general public up to a certain amount and may also engage in trust functions with prior permission of the central bank. They are not allowed to engage in foreign exchange transactions.Bangladesh Bank is empowered to oversee and regulate the affairs of the NBFIs under the provisions of the Financial Institutions Act 1993 and the Financial Institutions Rules 1994. To improve the quality of financial intermediation and meet up the growing needs of funds for financing investments in different sectors of the economy, the government intends to intensify the financial market by granting permission to establish private NBFIs in conjunction with the private commercial banks. At present, non-bank financial sector of the country comprises investment and finance companies, merchant bankers, leasing companies, mortgage banks, insurance companies, and the capital market. Although small, the NBFI sector in Bangladesh is a growing component of the entire financial sector and NBFIs as a group create an opportunity to improve financial intermediation for the economy. Non-bank financial institutions are an important part of financial system in Bangladesh, operations are regulated under the Financial Institutions Act, 1993. The non-bank financial institutions consist of investment, finance, leasing companies etc. Presently, 30 NBFIs are running their businesses in the country and 21 of the non-bank financial institutions are listed with the countrys stock exchange.ENACTMENT OF THE FINANCIAL INSTITUTION ACT

With the initial success of the FIs, sudden increase of numbers & the significant

contribution to the national economy of Bangladesh as an alternate source of finance, the Government felt the necessity of having a legal framework to license, regulate and monitor the activities of FIs and hence enacted the Financial Institution Act, 1993. The Act codified into law a number of prudential financial norms for conducting the lending operations of FIs & Bangladesh Bank has been entrusted with the responsibilities for supervision & implementation of the Act.

Bangladesh Bank has been entrusted with the responsibilities for licensing & supervision the activities of NBFIs. NBFIs are required to furnish monthly, quarterly, semi-annual and annual reports on their operational performance to Bangladesh Bank. In addition, they are required to submit monthly statements on position of their liquid assets & liabilities as well as public deposits and cash reserve maintained with the Central Bank. For issuance of shares, bond & debentures, prior permission from the Securities and Exchange Commission is required.

The other main regulations include:

TAXATION

The corporate tax rates for FIs has been set at 42.5% on taxable income (same as Commercial Banks) irrespective of their listing or non listing status. Listing is mandatory for the FIs, generally with in three years of commercial operation.

ACCOUNTING FOR LEASES & DEPRECIATION

No specific accounting standard for the lessor or lessee was established till December 31, 2003. Generally Accepted Accounting Principles (GAAP) used to be followed under which the lease assets were shown in the books of the lessor while the rental payments were considered as revenue expenditure by the lessee for financial reporting. However, effective from January 01, 2004, the Institute of Chartered Accountants of Bangladesh (IACB) has adopted International Accounting Standard (IAS)-17 which deals with the leases. With the adoption of this standard, it has become mandatory for the leasing companies to follow the financing method of accounting for financial reporting under which the lease assets are shown as fixed assets in the books of the Lessee with a corresponding liability and the future rental receivables are shown as receivables in the books of the leasing company.

MINIMUM CAPITAL REQUIREMENT

The Bangladesh Bank decided that the minimum equity base (paid up capital + reserve) of any NBFI licensed under the Financial Institutions Act 1993 should be Taka 500.0 million.

SHAREHOLDING LIMIT

No family member individually or collectively can hold more than 20% share of any financial institution. In case of institutional shareholder this limit is 25%.

V. STATUTORY RESERVE REQUIREMENT

FIs are required to maintain a non-interest bearing cash reserve equivalent to 2.5% of public deposit with the Central Bank. Furthermore, it is required to maintain, at all times, 5% of their liabilities in the form of liquid assets.

V1. EXPOSURE LIMIT

The maximum exposure limit to a company and/or a Group is 30% of the equity base of the FI.

FORMATION OF BANGLADESH LEASING AND FINANCE COMPANIES

ASSOCIATION

Bangladesh Leasing and Finance Companies Association, a representative body NBFI has been formed in 1999, to serve as a forum for interacting among the NBFIs on matters which affect the industry and to act as the official voice of the sector. Out of 30 licensed NBFIs 26 have registered themselves as member of the association. The Association is active and has been playing a positive & creative role to protect the interest of the member and contributing in the formulation and implementation of various national financial policies.

MARKET SCENARIO OF FINANCIAL INSTITUTIONS

Although the operational history of FI in Bangladesh is not very long but now the

industry has matured and grown consistently over the past several years and gained its due place in the financial sector after overcoming the initial adversity. A strong market consciousness was created among the entrepreneurs.

Most of the FIs started their journey with the lease financing as their core product with full pay out financial leases and no body is involved in operating lease but gradually diversified in other lines of business like term lending, housing finance, merchant banking, equity financing, factoring, credit card operation, stock broking, primary dealership etc.

Although the annual portfolio size of FIs is on growing trends but unfortunately the growth momentum of Leasing has lost the ground mainly for withdrawal of depreciation allowance from the books of the lessor. The quantum of lease amount was about 58% of the portfolio of the FIs in 2009 which came down to 40% in 2010.

The investment portfolio of FIs has been growing at an average rate of about 25% over the last five years. The investment portfolio of FIs as on December 31, 2010 stood at Tk. 201.1 billion.

Year-wise Disbursement & Investment Portfolio of FIs

YearDisbursementTaka in Billion

200629.773

200739.6102.9

200846.5127.5

200972.2160

2010137.5201.1

Recent Development and Activities of NBFIsBangladesh Bank has undertaken a number of moves to institutionalize good governance in the FIs in order to build management capacity with skilled & professional personnel and ensure transparency, accountability and dynamism. Besides in order to strengthen the financial base of the FIs, BB in collaboration with BLFCA has been working to implement Basel-II for the FIs, in line with the Banks.

It would be paranoid to say that FI has done a great bit in the industrial development of Bangladesh. But the fact remains unchallenged that they blew a fresh breeze in the traditional financial segment in the country and FI became a force to recon with. This implied lot of changes with in the banking sector itself. The eagerness of banks to review their own systems & norms to face the threat of FI is itself very significant from development point of view. Hence what is significant is not the direct extent of contribution made by the FI, but the realization that the finance is also like selling a product at a price, and there is no reason why financial market can always remain the sellers market. Today the customer get a much better deal even with the bank, this is the result of competition.

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.Bangladeshs NBFIs come under Basel-II Non-banking financial institutions (NBFIs) have come under Basel-II framework on a test-run basis from January 1 this year as part of the central banks move to consolidate their capital base and minimise inherent risk.

The central bank of Bangladesh has already introduced draft guidelines on Basel Accord for Financial Institutions (BAFI), which will come into force from January 01, 2012 with its subsequent supplements and revisions.

The central bank has taken the move to boost financial base of the NBFIs and ensure their management efficiency in the long run through using the best global best practices," .BB has introduced the draft BAFI on a pilot basis from January this year in line with its action plan for implementation of Basel-II in the NBFIs, which are popularly known as leasing companies.

Under the action plan, one-to-one meeting with all of the countrys 29 NBFIs will be held from April to August this year for analysing their feedback to finalise the guideline.

According to the BB guidelines, the business of financial institutions has become more complex and the risks inherent with the activities of the NBFIs are required to address properly for the smooth functioning of the industry.

With a view to identifying and managing these risks, a robust risk management as a strong capital base is a vital requirement, it said.

The Basel-II framework, the most widely used accord which sets the benchmarks for banks and other financials institutions across the globe has come into effect for all Bangladeshi commercial banks from January 2010.

The framework is based on three mutually reinforcing pillars: ensuring minimum capital requirement (MCR), supervisory review process (SRP) and market discipline. The accord outlines the level of capital required by a NBFI against credit, market and operational risk based on the risk profile of the organisation.

The primary objective is neither to raise nor to reduce regulatory capital for the financial institutions. However, the capital requirements for a specific financial institution may increase or decrease depending upon its own risk profile, the central bank said.

An NBFIs capital ratio will be calculated by dividing the total capital by the sum of risk-weighted assets of credit risk, market risk and operational risk under MCR, adequate capital will be calculated under the SRP and transparency of the activities of financial institutions towards stakeholders will be ensured through market discipline.BB asks NBFIs to double their paid-up capital to Tk 100 cr by June 2012The Bangladesh Bank has asked the non-banking financial institutions (NBFIs) to double their paid-up capital Tk 100 crore by June 30 next year to help consolidate their capital base for minimising risks.

Headquarter of The Central Bank of BangladeshThe Department of Financial Institutions and Markets of BB in a circular asked the NBFIs to raise the paid-up capital to the newly-set amount by June 30, 2012. The NBFIs should increase their paid-up capital to Tk 100 crore, unless their capital reserved against risk-based assets is already higher than that, the BB circular said.The NBFIs can float initial public offering or issue right shares or bonus shares to mobilise funds required for increasing their paid-up capital to the new ceiling. The circular also said the NBFIs would not be allowed to offer cash dividends until they fulfilled the newly-set paid-up capital requirement.

Under the latest directives of Bangladesh Bank (BB), the NBFIs will have to raise their paid-up capital up to a minimum of Tk 1.0 billion (100 crore) by June 30, 2012 from the existing Tk 500 million (50 crore).The NBFIs have been asked to meet the required capital through issuing rights or bonus shares or floating initial public offerings (IPOs). But no NBFI will be allowed to offer cash dividends as long as they run capital deficit, according to a central bank circular, issued on Sunday.

"At least 18 NBFIs will have to issue rights or bonus shares to comply with the latest circular of the BB relating to capital base, the central bank official said, adding that paid-up capital of two NBFIs have already exceeded Tk 1.0 billion.

Presently, 30 NBFIs are running their businesses in the country and 21 of the non-bank financial institutions are listed with the countrys stock exchange. Earlier on November 4, 2009, the central bank had directed the NBFIs to double their minimum paid-up capital to Tk 50 crore by December 31, 2010.According to BB data, some of the NBFIs are yet to comply with that directive. The BB data show that, as on June 30, 2011, the total investment made by the countrys 30 NBFIs is Tk 16,350 crore, of which Tk 1,540 crore is invested in the capital market. Three types of risks - credit risk, market risk, and operational risk - have to be considered for the purpose of deciding the minimum capital requirement.

CHAPTER VA few example of activities of NBFIs Non-Banking Financial Institutions

Non banking financial institutions are the financial institution that does not meet legal definitions for a bank but still provides banking services. NBFCs can also be financial institutions that operate without a license. Non-banking Financial Institutions carry out financing activities but their resources are not directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings for rendering other financial services including investment. All such Institutions are financial intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions. Non-Banking Financial Institutions in Bangladesh:-

Bangladesh Finance & Investment Co. Ltd., Bangladesh Industrial Finance Company Limited (BIFC), Bay Leasing & Investment Limited, Delta Brac Housing Finance Corporation Ltd. (DBH), Fareast Finance & Investment Limited, Fidelity Assets & Securities Company Ltd., GSP Finance Company (Bangladesh) Limited (GSPB),First Lease Finance & Investment Ltd., Hajj Finance Company Limited,IDLC Finance Limited, Industrial and Infrastructure Development Finance Company (IIDFC) Limited, Industrial Promotion and Development Company of Bangladesh Limited(IPDC), Infrastructure Development Company Limited (IDCOL),Uttara Finance and Investments Limited,Islamic Finance and Investment Limited,LankaBangla Finance Ltd.,MIDAS Financing Ltd. (MFL),National Finance Ltd,National Housing Finance and Investments Limited

Oman Bangladesh Leasing & Finance Limited,People's Leasing and Financial Services Ltd,Phoenix Finance and Investments Limited,Premier Leasing & Finance Limited,Prime Finance & Investment Ltd,Saudi-Bangladesh Industrial & Agricultural Investment Company Limited (SABINCO),The UAE-Bangladesh Investment Co. Ltd,Union Capital Limited,United Leasing Company Limited (ULCL),International Leasing and Financial Services Limited.In this chapter I have described the activities and profile of a few of these institutions.LankaBangla at a Glance

LankaBangla Finance Limited, a joint-venture listed financial institution established with multinational collaboration, started its journey in 1997. The institutional shareholding structure and corporate culture have enabled LankaBangla to be one of the most diversfied financial service providing institutions of the country.Under the right direction of the resourceful management the company has emerged as one of the leading Financial Institutions in the country. LankaBangla is the lone Non-Banking Financial Institution who operates MasterCard & VISA card including third party processing business with other banks. The company is also involved in dealing with Securities as Broker in Capital Market at both DSE & CSE through its Subsidiary named LankaBangla Securities Limited who is the business leader in this arena. The Merchant Banking Department has been converted into another subsidiary of LankaBangla Finance to comply with the statutory regulations who is catering to the premier investment banking services.LankaBangla has been able to widen its operational periphery by inaugurating full fl edged branch in Chittagong and Sylhet. The company has been awarded the ICAB national award consecutively from 2006 to 2009 and SAFA merit award 2008 and 2009 that represent the transparency in disclosure of information.Heading towards becoming

the nations most preferred financial services provider, we have diversified our products & services; strengthened our people; improvised our systems, processes & policies; made our stakeholders believing in reaching the sky. To further expand our horizon, we are now focused towards empowering the society

utilizing our hard earned valued possessions as Light of Empowerment.VisionTo be the nations most preferred financial services provider.MissionTo lead by example through a commitment that empowers the organization at

every level to strive for the highest levels of quality, customer care and

stakeholder value.Goals

To be the most sought after facilitator in creating wealth.

To maximise the value of being our Customer, Shareholder or Employee.

To establish strong regional presence.

To optimise contribution to the society.

Core Values

Integrity: We are committed to conduct that refl ects the highest standard of integrity in everything we do.Teamwork: It is the essence of our ability to succeed as a trusted and preferred

provider of financial solutions to our clients. Our overriding loyalty is to the good of the whole organization. We learn from each other and share our skills and resources across organizational boundaries for our stakeholders benefi t and our own.Respect: We respect every individual. We draw strength from equal opportunity at the same time supporting personal growth and development. We value and we all benefi t from the entrepreneurial spirit of each individual.

Professionalism: We are committed to the highest standards of professionalism, we pursue innovation, we continually quest for quality at each level, we are open to new ideas and we act decisively and consistently. We are determined to deliver outstanding quality so that our relationships with our clients will be long-lasting. Value creation: We offer what creates and maximizes value to the stakeholders and the society. Strategic Objectives Enrichment & expansion of financial offerings by introducing new product and service lines through proper diversication and customization of existing products & services for ensuring maximum market coverage to meet & exceed stakeholders needs & expectations. Continuous improvement in operational processes through technological advancement, employee capacity building and improvement through human resources development programs, thereby ensuring effective and effcient utilization of resources to maximize the value of the company. Strengthening building blocks to consolidate the product & service framework and maintaining strict compliance to good governance norms and regulations to ensure long term sustainability of the company.

Building synergy among resources and activities to ensure maximum outputs from resource inputs. Contribute to the society to share the achievements of the company with the nation.

LankaBangla is a value driven organization that means we do not depart from our principles even if it gives sometimes temporary benefit to the company. We believe and recognize that our company remains in our heart and its reputation and dignity are absolutely priceless asset. The companys affairs get the utmost priority of all the employees. Our reputation not only affects whether or not someone will be our customer; it also determines whether we are proud to be associated with this organization.The Code of Conduct is designed to guide the employees of the company to observe, comply with the prudential norms of conduct, manner and behaviour. It is in alignment with the Companys Vision and Values to achieve the Mission, Objectives and Aims at enhancing the ethical and transparent process in managing the affairs of the Company. It also applies to every employee of LankaBangla and may be furnished to others for discharging the responsibilities. In addition to the ethical guidelines included in the code, there are many laws and regulations that affect each of the business that we do. Complying to law is mandatory for everyone and is not subject to business priorities or individual

discretion.Personal Responsibilities

Be an ethical role model by maintaining integrity and devotion to work Protect and enhance companys interest, dignity and reputation Act in accordance with highest standards, adequate professionalism and excellence in quality output Adherence to the companys policies, laws and regulations that obviously apply to the job

Always act and behave like an ambassador of the company

Workplace Responsibilities

Treat colleagues with respect and dignity Support the companys commitment to diversity and equal employment opportunity Provide a positive work environment free from intimidation and harassment Do not hold any outside positions with, or accept business opportunities from anyone who does business or competes with the company Ensure that financial records are accurate and complete

Maintain an effective system of internal controls over financial reporting Protect companys assets and propertiesMarketplace Responsibilities

Act responsibly in all sort of communications with customers, suppliers, vendors, partners and regulatory authorities Safeguard the privacy, confidentiality and security of customer data Make only factual and truthful statement about the companys products Gather business intelligence properly and ethically Prevent the use of companys services against money laundering purposesCorporate Citizenship

Support all communities and optimize contributions to the society Protect the general safety and the environment Respond to public and cooperate with the government

Products and ServicesCredit and Investment Products

Lease Finance

Term Finance

Short Term Finance

Working Capital Finance

Work Order Finance

Factoring Finance

Personal LoanDeposit Schemes

Periodic Return Term Deposit

Cumulative Term Deposit

Double Money Term Deposit

Money Builders Term DepositMortgage Loan

Home Loan

Real Estate Developers FinanceMerchant Banking Operation Investors Portfolio Management Services

Margin Loan

IPO Advisory

Issue Management

UnderwritingSME Finance SME Finance- for small and medium businesses to empower the people.Corporate Services Syndication of Lease/Loan

Corporate Advisory Services

Investment CounselingAuto Loan Car Finance for individuals and institutions.Stock Broking Cutting edge Broking provided by LBSL, our SubsidiaryCard Operation Primary Dealership MasterCard & VISA Card Issuing

MasterCard Acquiring

Third Party Card ProcessingPrimary and secondary operation of Treasury Bill and

Treasury Bond

Milestones of LankaBanglaIncorporation of the Company 5th November, 1996

Commencement of Business 5th November, 1996

Registration of First Subsidiary (LankaBangla Securities Limited) 3rd July, 1997

Licensed as Financial Institution by Bangladesh Bank 30th October, 1997

Signing of First Lease Agreement 30th March, 1998

Issuance of First Credit Card 16th August, 1998

Launching of MasterCard 5th September, 2005

Listing on Dhaka Stock Exchange 17th October, 2006

Listing on Chittagong Stock Exchange 31st October, 2006

Trading of share in Stock Exchanges 1st November, 2006

Commercial Launching of Chittagong Branch 19th February, 2007

Registration of Second Subsidiary (LankaBangla Asset Management Company Limited) 16th July, 2007

First disbursement of Domestic Factoring 11th December, 2007

First disbursement of Mortgage Loan 18th February, 2008

Commencement of Operation of Sylhet Branch 27th April, 2009

Licensed as Primary Dealer 23rd November, 2009

Issuance of First VISA card 24th November, 2009

Participation in the 1st Auction of Govt. Securities as Primary Dealer 1st December, 2009

Registration of Third Subsidiary (LankaBangla Investments Limited) 29th March, 2010

Statement on Corporate Social ResponsibilitiesWe believe that our business financing is necessary for business progress and is intrinsically tied to the overall economic development. We welcome you to read this report to learn how we operate responsibly in the eye of both: regulators and the society.Corporate Responsibility at LankaBangla means demonstrating its vision and values throughout our corporation, throughout our operations, and throughout our partnerships. In this document our 14th annual Corporate Responsibility Report we are proud to share how our compliance, social and governance systems, processes and actions support our vision to be a company most admired for its

people, partnership and performance.We always intend to operate business in a manner that accounts for the social and environmental impact created by the business finance by LankaBangla. We are deeply committed to develop policies that integrate responsible practices into daily business operations, and to reporting on progress made toward implementing these practices.

From the standpoint of Corporate Social Responsibility (CSR), we discharge our task in a way to incorporate: Adoption of internal controls in complying with the requirements from regulatory bodies;

Commitment to diversity in hiring employees and barring discrimination;

Management teams that view employees as assets rather than costs;

High performance workplaces that integrate the views of line employees into decision-making processes;

Adoption of operating policies that exceed compliance with social and environmental laws;

Encouraging business through advanced resource productivity, focused on the use of natural resources in a more productive, efficient

and profitable fashion (such as recycled content and product recycling);

Taking responsibility for conditions under which goods are produced by the undertakings financed by us.LankaBangla is devoted to the best utilization of human resources. LankaBangla has long been dedicated to driving educational improvement; in fact, education has been part of LankaBangla culture since it was founded in 1996. LankaBangla has donated an illustrating amount of money in 2010 through different educational programs such as scholarship, debate, etc.As part of its CSR duties, LankaBangla took steps to distribute blankets and different kinds of warm clothes among the poor people living in different slums and areas in Dhaka city during the winter season. The programs to distribute the clothes to protect the poor from fierce cold were arranged from the initiative of LB Foundation. The programs were attended by Managing Director and other high officials as well as operating people of LankaBangla.LankaBangla is well aware of the health, safety and well being of employees and their immediate family members. And in this connection, LankaBangla provides hospitalization insurance coverage facilities to the staff. At the same time, LankaBangla has insurance scheme for its employees against unforeseen accidental loss and death.

In conclusion, LankaBangla typically addresses issues impacting virtually every area of operations: governance and ethics; employee hiring, opportunity and training; responsible purchasing and supply chain policies; energy and environmental impact, etc.

Consolidated Financial HighlightsYear 2010, another successful year for LankaBangla securing results ahead of plan. Lankabangla has reinforced its efforts to maximize the Value for our esteemed Shareholders by redefining our approach in creating Wealth providing prudent services. Our unique approach to value creation resulted in a significant improvement in the figures we reported for the year.

Prime Finance at a glanceMissionMission is to

Grow profitably Through partnership with our clients delivering innovative solutions to cater their financial needs;Create shareholders' value through client satisfaction and employee commitment to excellence;Enhance the ability of our employees giving opportunity to have access to adventurous experience through serving our communities with integrity and pride.

Vision

We aspire to be a market leader providing integrated financial solutions with special focus on creating value :

For our clients Working closely with our clients;

For our shareholders Maximizing shareholderswealth achieving superior performance;

For our employees Providing a workplace in which employees are rewarded and

respected properly;

For our communities Supporting community initiatives in health, education, arts and economic & social development.Overview of performance in 2010Prime Finance delivered a strong performance in 2010. Our net profit after tax was Tk. 1,726.42 million, which crossed more than billion mark in the first time of the Companys history. Net profit and Earnings Per Share increased by 152.72 percent over the last year. Our total assets at 31 December was Tk. 13,200.83 million compare to Tk. 10,373.18 million in 2009 resulting a growth of 27.25 percent. Our capital position is also very strong. We closed 2010 with total shareholders equity of Tk. 3,488.34 million compared to Tk. 1,826.39 million of

2009 resulting a tremendous growth of 91 percent. During the year, Company earned an appreciable amount from its capital market operations. Earnings from capital gain on sale of securities were 1,224.22 million compared to Tk. 465.88 million in 2009 resulting a growth of 162.77 percent. This reflects that Company could utilize its resources efficiently for getting competitive advantage from the favorable capital market throughout the year.

1Moving Ahead

Prime Finance started its journey in the year 1996 backed by some leading corporate houses and individual entrepreneurs. Prime Finances long-term record of growth and evolution continued since inception. The strength of our balance sheet, together with our pursuit of opportunities for continued growth, led to a range of successful initiatives. The diversity of operations is a key to our strength.What Prime Finance today is for continuous support and confidence of our clients, shareholders, employees, communities and other stakeholders. Prime Finance established itself such a Company which accomplished its mission by being clear and easy to understand customers needs, by standing beside customers in their tough time, by making every good loan the Company can, by providing advice that helps the clients plan for it all, by delivering customized solutions wherever the clients need from the Company, by showing good return for the shareholders, by making itself a Company by choice for the employees and by working hard to keep its communities vibrant.Today, Prime Finance is the parent of a renowned financial group namely Prime Financial Group. Under the leadership of the Company, several new Companies have been formed for providing service to customers in different areas. Now Prime Finance is a company for its customers, shareholders, employees and the Community as a whole. We believe that with the help of the stakeholders, the Company will maintain its pace for the development in all respects.

Contribution to National Economy

At Prime Finance we are recognizing that we have certain responsibilities to the development of the society and the country as a whole. We aspire to be known as an institution that builds enduring relationship with and delivers value for our clients, shareholders, employees and the community where we work.As a financial service provider, Prime Finance contributes to the economic prosperity by providing financial products and services to the industrial undertakings including SMEs. Based on the financial as on 31 December 2010, Prime Finance has a total credit exposure with around 1,220 clients of Tk. 8,720.70 million. Such facilities were extended mostly for importation of capital machineries and working capital and margin loan purpose. Prime Finance also

manages IPOs of different companies to increase supply of securities in the capital market. This is how Prime Finance contributes to the industrialization and capital market development of Bangladesh and thus helping employment generation.Prime Finance contributes to the economy paying out fair share of taxes to Government. During the year 2010 the Company provided provision of Tk. 259.41 million for tax. We make an economic impact by creating employment and a well-trained workforce. Prime Finance and its associate companies employed as many as 166 employees as on 31 December 2010 (2009:134). During the year 2010, Prime Finance spent total Tk. 1.15 million for training

and HR development. During the year 2010, Prime Finance paid a total amount of Tk. 86.32 million as salaries and allowances to its employees (2009 : Tk. 63.44 million). In 2010, the employees of Prime Finance paid taxes to the tune of Tk. 3,097,040 with highest payment of Tk. 637,250 by an individual employee.

We recognize our fiduciary duty to our shareholders and seek to establish constructive relationships. We are focused on maximizing long-term shareholders' value through strong financial performance and returns, disciplined and profitable investments. Over the past many years, Prime Finance has been paying a satisfactory dividend to its shareholders placing it among the top ranking non-banking financial institutions. Prime Finance proposed 80 percent

stock dividend equivalent to Tk. 722.00 million to its shareholders for the year 2010 (2009: 40 percent stock dividend equivalent to Tk. 257.86 million & 10 percent cash dividend equivalent to Tk. 64.46 million). We always agree in building prosperity by supporting a broad range of causes through donation and sponsorship. We encourage our employees to participate in social and charitable programs.As a part of its social responsibility, the Company contributes to

various funds, flood affected people, to hospitals and to the people who were affected by the natural calamities.We believe that sustainable economic growth and a healthy environment are inter linked. We take supportive role in terms of providing financial services by restricting and discouraging those projects that cause pollution for environment and health hazard.

DBH

Highest Rated Financial Institution in Bangladesh-DBH

Core Purpose

To strengthen the society of the country by continually expanding home ownership

Core Values

Outstanding service to the customer, above all else

Honesty, integrity and ethics in all aspects of business

Hard work and continuous self-improvement, never being satisfi ed

Respect and concern for the individual employee

Individual opportunity, responsibility and reward based on merit

CORPORATE SOCIAL RESPONSIBILITYBusiness is being asked to assume broader responsibilities to society than ever before and to serve a wider range of human values, and thereby Corporate Social Responsibility is a concept with a growing prevalence in Bangladesh and around the globe. It means taking responsible attitude going beyond the legal requirements towards society. CSR is the platform where any corporate has the opportunity to cut across almost all stakeholders by addressing the issues, like; deal responsibly with customers and suppliers, work with the local community for its betterment, understand environmental impact. As part of its CSR effort, DBH patronizes number of programmes to have greater involvement with the local community.Employees of DBH took part in the volunteers sponsorship home building activities launched by Habitat for Humanity International Bangladesh (HFHIB) at Savar in Dhaka on Friday (05 February 2010). Habitat for Humanity International Bangladesh (HFHIB), an internationally reputed non-government organization (NGO) with the financial assistance of DBH constructed low cost houses for the low-income families in Savar. DBH is the fi rst among the countrys financial institutions, which is supporting to build low cost houses for low-income families. Based on HFHIBs experience in post-disaster reconstruction & recovery projects, particularly after the Cyclone SIDR and 2007 floods, HFHIB recognized the need to develop the capacity of community to meet future disasters. Realizing this Habitat Bangladesh has been running its Community Based Disaster Mitigation (CBDM) program since January 2009 in the South West region of Bangladesh. Through the CBDM program, HFHIB wants to organize its effort to equip communities to mitigate against future disasters and reduce risks at the community level.The CSR funding from Delta Brac Housing Finance Corporation Ltd. has been supporting the CBDM program of HFHIB to build community resilience, especially among the poor and marginalized, to withstand natural disasters ensuring limited loss of life and assets in the water-logging area of Tatulia union of Tala Upazilla in Satkhria through the activities during the project period of March-June 2010. This project intends to help communities reduce their vulnerability and build their capacity to recover quickly during forthcoming disasters by providing technical and financial assistance to 40 families to avail retrofitting services and by increasing the capacity of 100 families at the risk of fl ood and cyclone disasters to mitigate their sufferings through disaster management training. DBH provided assistance to HFHIB for building shelters

for the Aila affected families.

CORPORATE AND FINANCIAL REPORTING FRAMEWORK

The Members of the Board, in accordance with the Securities & Exchange Commissions Notification no. SEC/CMRRCD/2006-158/Admin/02-08 dated February 20, 2006; confirm compliance with the financial reporting framework for the following: The financial statements prepared by the Management of DBH, present fairly its state of

affairs, the result of its operations, cash flows and changes in equity. Proper books of account of the issuer company have been maintained. Appropriate accounting policies have been consistently applied in preparation of the financial statements and that the accounting estimates are based on reasonable and prudent judgment. International Accounting Standards, as applicable in Bangladesh, have been followed in preparation of the financial statements and any departure there from has been adequately disclosed.

The system of internal control is sound in design and has been effectively implemented and monitored. There are no significant doubts upon the issuer companys ability to continue as a going concern.

COMPANY AND ITS ACTIVITIES

(a) Legal status Delta Brac Housing Finance Corporation Limited (here-in-after referred to as DBH or the Company) was incorporated as a public limited company and obtained the Certifi cate of Commencement of Business under Companies Act 1994 on May 11, 1996. The Company has also been granted license under the Financial Institutions Act 1993 on July 15, 1996. The Company raised additional capital of Tk. 105,000,000 including premium of Tk. 55,000,000 through Initial Public Offering in 2007-8 and the shares of the Company are listed in Dhaka and Chittagong Stock Exchange in Bangladesh.(b) Nature of business

i) The principal activities of the Company during the year were providing loans for construction of houses, purchases of fl ats or houses, extension and improvement of existing houses or fl ats and purchase of housing plots. The Company also provides services for purchase, sale and transfer of real estate assets.ii) The Company has also various investment and financing products like term deposit scheme, cumulative deposit, triple money deposit, double money deposit, annual income deposit, quarterly income deposit, monthly income deposit, easy way deposit, profi t fi rst deposit etc. for its individual and corporate clients.2 SIGNIFICANT ACCOUNTING POLICIES2.1 Statement of Compliance & basis of preparationThe financial statements have been prepared on a going concern basis and accrual method under historical cost convention and in accordance with Generally Accepted Accounting Principles (GAAP). The preparation and presentation of the financial statements and the disclosures thereto have been made in conformity with Bangladesh Accounting Standards (BAS) and Bangladesh Financial Reporting Standards (BFRS), the

Companies Act 1994, the Financial Institutions Act 1993, Securities and Exchange Rules 1987, the listing rules of Dhaka and Chittagong Stock Exchanges and other applicable laws & regulations in Bangladesh and practices generally followed by Housing Finance Institutions.2.2 Going concernThe financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.2.3 Functional and Presentation currencyThese financial statements are presented in Taka, which is the companys functional currency except as indicated figures have been rounded off to the nearest taka.

2.4 Use of estimates and judgments

The preparation of financial statements require management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. The key item which involve these judgments, estimates and assumptions are discussed, below: Impairment losses on loans and advances In addition to the provision made for loans and advances based on the guideline of Bangladesh Bank, DBH reviews its loans and advances portfolio on monthly basis whether a further allowances for impairment should be provided in the income statement. The judgments by the management is required in the estimation, of these amounts and such estimations are based on assumption about a number of factors though actual results may differ, resulting in future changes to the provisions.2.5 Materiality and aggregationEach material item as considered by management significant has been presented separately in financial statements. No amount has been set off unless DBH has a legal right to set off the amounts and intends to settle on net basis. Income and expenses are presented on a net basis only when permitted by the relevant accounting standards.2.6 Foreign currency transactions

Transactions in currencies other than the Companys functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are translated at the rates prevailing at the balance sheet date. Exchange differences are recognised in profit or loss in the period in which they arise.2.7 Liquidity StatementThe liquidity statement of assets and liabilities as on the reporting date has been prepared on residual maturity term as per the following bases:-a) Balance with other banks and financial institutions, money at call and short notice, etc. are on the basis of their maturity term.

b) Investments are on the basis of their respective maturity.

c) Loans and advances and lease are on the basis of their repayment schedule.

d) Fixed assets are on the basis of their useful lives.

e) Other assets are on the basis of their realization / amortization.

f) Borrowings from other banks, financial institutions and agents are as per their maturity/ repayment term.

g) Deposits and other accounts are on the basis of their maturity term and past trend of withdrawal by

the depositors.

h) Provisions and other liabilities are on the basis of their payment / adjustment schedule

2.8 Property, plant and equipments

a. Recognition

The cost of an item of property, plant and equipments shall be recognised as assets if, and only if it is

probable that future economic benefi ts associated with the item will fl ow to the entity, and the cost of the

item can be measured reliably.

Fixed assets have been accounted for at cost less accumulated depreciation. Cost includes expenditure that

is directly attributable to the acquisition of the items.

Subsequent costs of enhancement of an existing asset are recognised as a separate asset, only when it is

probable that future economic benefi ts associated with the item will fl ow to the company and the cost of

such items can be measured reliably. All other repairs and maintenance are charged to the Profit & Loss

account during the financial period in which they are incurred.b. Depreciation

Fixed assets are recorded at historical cost less accumulated depreciation. These are depreciated on reducing balance method.

Depreciation on newly acquired assets are calculated from the month of acquisition and depreciation on assets disposed off is charged up to the month of disposal. Gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between sales proceeds and carrying amount of the asset and is recognised in profit or loss.c. Sale of Fixed Assets

Sale price of fixed assets are determined on the basis of fair value of the assets. Gain or loss on sale of assets are recognised in profit & loss account as per provision of BAS-16 Property, Plant & Equipments.

2.9 Intangible assetsIntangible assets (computer software) are recorded at historical cost less accumulated amortization. These are amortized on reducing balance method using the rate at 25%.2.10 Loans

secured Repayment of mortgage loans is made by way of Equated Monthly Installments (EMI) consisting of principal and interest. There are two modes of interest calculation on loans i.e., monthly reducing or annual reducing method as per loan agreement between customer and DBH. Effective interest rate is same as the rate quoted in case of monthly reducing method but higher under annual reducing method. EMI commences once the entire loans are disbursed. Pending commencement of EMIs, pre-EMI interest is payable every month.2.11 Investment in marketable securities

Investment in marketable securities shares has been shown at cost or market price, whichever is lower, on an aggregate portfolio basis under Bangladesh Accounting Standard (BAS) 25 Accounting for Investment. Full provision for diminution in value of shares as on closing of the year on an individual investment basis has been made in the accounts.2.12 Cash and cash equivalents

Cash and cash equivalents consist of cash, FDR and bank balances. For the purpose of statement of cash flow, cash and cash equivalents are prepared net off bank overdrafts.

The statement of cash flows is prepared using the direct method as stipulated in Bangladesh Accounting Standard - 7 Cash Flow Statements2.13 Revenue recognition

Interest income -Interest income from loans - secured is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the