Second Small and Medium-Sized Enterprise Development Project (RRP BAN 36200)

FINANCIAL DUE DILIGENCE OF CANDIDATE PARTICIPATING FINANCIAL INSTITUTIONS (PFIs)

A. Bangladesh Bank Credit Rating of Selected Banks

B. Summary Description of Candidate PFIs

1. Bangladesh Small Industries and Commerce (BASIC) Bank was established and incorporated in August 1988 as a banking company under the Companies Act 1993 and launched operations in January 1989. It is now governed by the Banking Companies Act 1991 upon enactment of the banking companies law and has been 100% government-owned since 1992. It is a blend of development and commercial banking, as the bank is obliged to invest 50% of loanable fund for the development of SME industries. The independent auditor for the bank’s financial statement as on 31 December 2013 provided a qualified opinion and mentioned significant weakness in the bank’s internal control. There were also lapses and irregularities in the first half of 2013 which were resolved after the signing of the memorandum of understanding

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(MOU) with Bangladesh Bank (BB).1 BASIC Bank has diversified products relating to small and medium enterprise (SME) development, commercial and trading activities. The bank has 68 branches throughout the country. CRAB has assigned a BBB1 stand-alone rating, and A2 as government support rating, with a short-term rating of ST-3 for year 2012.

2. Bank Asia is a private commercial bank incorporated in September 1999 as a public limited company under the Companies Act 1994 and governed by the Banking Companies Act 1991, and obtained its banking license in October 1999. In 2001, the bank acquired the Bangladesh operations of the Bank of Nova Scotia Canada and, in 2002, acquired the Bangladesh operations of Muslim Commercial Bank Ltd (Pakistan). The bank went for public issue in September 2003 and it is listed in Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). Aside from its core banking activities, the bank also has Islamic banking, offshore banking, SME financing, among others. The bank has 91 branches, 5 SME centers and 97 automated teller machine (ATM) booths. In 2014, Bank Asia signed an agreement with SME Foundation, who will provide Tk30 million, a prefinancing for micro, small, and medium enterprise (MSME) of electric products manufacturing cluster at 9% interest rate. Bank Asia will extend collateral free loans up to Tk80 million. The bank has 3 subsidiary companies: Bank Asia Securities limited, BA Exchange Company (UK), and BA Express USA. Bank Asia also has an offshore banking unit at Chittagong Export Processing Zone. CRAB rated Bank Asia as ‘AA3’ the long-term and ‘ST-2’ rating in the short term in consideration of financials up to 31 December 2014. 3. BRAC Bank was incorporated in May 1999, commenced commercial operations in July 2001, and underwent an IPO in 2006. Its paid up capital is Tk7,092 million against an authorized capital of Tk12,000 million at end of December 2014. Its shareholdings pattern include 44.6% by BRAC, one of the largest nongovernment organizations in the world, 43.47% by International Financing Corporation, and the balance by mutual funds, institutions & general public, and non-resident Bangladeshi. The bank offers a full range of banking and investment services for retail, corporate, and SME customers. BRAC Bank’s Board has 8 members comprising 7 non-executive directors and one Managing Director and CEO. The Board is involved in policy formulations, strategic direction setting, business plan approval, review of various activities, providing direction to the management for conduct of its business as well as ensures effective risk management across the bank per BB’s guidelines. BRAC Bank has a wide network of branches across the country. Its branches are divided in 3 categories: branches, SME/Krishi branches, and SME services centers. BRAC Bank’s operations include 97 branches (54 in urban locations and 43 in rural locations), 69 SME and/or agribranches and/or service centers, 145 zonal offices and 563 SME unit offices. CRAB rated BRAC Bank AA2 in the long term and ST-2 rating in the short term in May 2015. The rating reflects the bank’s strength in risk weighted capital adequacy, stable low cost deposit base as well as wide network of branches along with good brand value. BRAC Bank’s net profit increased by 50% from Tk1,397 million in FY2013 to Tk2,092 in FY2014. Net interest income rose by 11% from Tk6,851 million in FY2013 to Tk7,602 million in FY2014 due to efficient utilization and management of funds. Capital adequacy is at 14.7%.

4. Dhaka Bank has the legal and institutional prerequisites to establish its initial eligibility. It is a private sector commercial bank focusing on corporate banking, retail banking, SME banking, and Islamic banking. The Board functions are relatively effective. There is an independent director to provide impartial oversight of the management performance. Delegation

1 ADB will exclude BASIC Bank from its participation in the ADB credit line under SMEDP2 as a PFI until it has

received a unqualified opinion opinion from an independent auditor and BB has confirmed its compliance with all prudential financial guidelines.

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of power is adequate. Dhaka Bank has adequate SME sector lending exposure. Its corporate and commercial loan portfolio includes potential SME sectors such as textile and garments, real estate, trading, and manufacturing. Dhaka Bank also utilized technical assistance from the World Bank and other development agencies for continuous improvements in its SME products and services. Dhaka Bank continuously builds its network with a total of 44 branches and potentially expanded SME outreach capacity. There is appropriate mechanism to cover credit, market, operations, and compliance risks. CRISIL assigned an A+ rating in the long term and ST-2 in the short term as of March 2009. The financial performance of Dhaka Bank remained satisfactory.

5. One Bank has the legal and institutional prerequisites to establish its initial eligibility. It is a private commercial bank. The clientele includes reputable businesses in trading, manufacturing, and services in various sectors of the economy. The company held an initial public offering (IPO) in June 2003 and raised about Tk600 million in capital. There is a concentration of ownership and the rights and equitable treatment of shareholders needs improvement. The delegation of power is limited. The company focuses largely on financing medium-sized to large enterprises of working capital loans and long-term financing, and has limited operation in small enterprise lending. Risk management and loan pricing are designed to reflect risk-based lending. The 2006 and 2007 ratings by CRISIL are A in the long term, and ST-3 and ST-2 in the short term, with a positive outlook. The financial performance of the company was satisfactory compared to its peers. 6. Premier Bank has the legal and institutional prerequisites to establish its initial eligibility. It is a private commercial bank and was issued a banking license by BB in 1999. The company operates on both conventional and Islamic banking. The company went public in 2007 and is now listed in both DSE and CSE. Corporate governance is adequate and there are sufficient checks and balances between the Board and Management. There are 7 rural branches that could potentially assist SME finance in nonurban areas. Risk management is appropriate but additional risk exposures exist for Shariah-based lending operations. CRISIL upgraded the company from BBB+ in 2007 to A–in 2008 in the long term and maintained the ST-3 rating in the short term. The overall financial performance improved in 2008.

7. Prime Bank is a highly acclaimed private commercial bank and it meets most pre-identification conditions for PFI eligibility. It is a publicly listed bank registered to both DSE and CSE. It has grown both horizontally and vertically. Prime Bank's Board function is effective. The Board has delegated all administrative power and required financial and business powers to management. Prime Bank offers a wide range of conventional and Islamic products and services, including SME finance. It has the commitment and strong capacity to cater the SME sector. Risk management is thorough and comprehensive. CRISIL maintained its AA rating in the long term and ST-2 in the short term as of June 2008. Prime Bank's performance is satisfactory among the competing banks and is above average in terms of the banking sector as a whole.

8. Trust Bank has the legal and institutional prerequisites to establish its initial eligibility. It obtained a license from BB in 1999. Army Welfare Trust of the Bangladesh Army is the major shareholder. Trust Bank offers a full range of commercial banking services, including SME finance. In terms of corporate governance, ownership was highly concentrated until recently. Delegation of power is appropriate. The relatively extensive branch network is sufficient to provide some SME outreaches. Trust Bank adopted the best practice guideline suggested by BB and it has a written credit policy manual. CRISIL assigns A in the long term and ST-2 rating in the short term as of 2007. Trust Bank's performance was average during 2007 compared to its peers. The operating efficiency is satisfactory.

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9. Jamuna Bank Limited (JBL) is a public limited company incorporated in 2001 as a bank under the Companies Act 1994. It started commercial operation in 2001 and listed with DSE and CSE in 2006. JBL consists lease financing (3%), term and/or time loan (26%), SME (14%), home loan (1%), and agricultural credit (1%)—short-term credit cover 55% of the total credit portfolio of Tk69,355 million as of 31 December 2014. The sponsors of the company hold 62.3% of paid up capital of Tk5,161 million. The remaining 37.7% are held by financial institutions (10.8%), foreign investors (0.1%), and general public (26.7%). The 21-member Board is led by the Chairman, and the Managing Director as ex-officio director. The Board is mandated for policy issues and review of company performance. The Board forms the Executive Committee, Audit Committee, Risk Management Committee, and Management Committee. JBL has complied with the conditions of corporate governance guidelines for the year ended 31 December 2014. JBL records its SME lending separately. It has an individual SME division headed by the Vice President. Nonperforming loans (NPLs) reduced to 5.68% in 2014 which was 7.58% in 2013 against the average of 9.69% for the banking sector as of 30 June 2014. CRAB assigned A1 rating to JBL in the long term and ST-2 in the short term based on the information as of 31 December 2013. As of 31 December 2015, net operating profit has increased from Tk1,065 million in 2010 to Tk1,347 million in 2014; while return on equity (ROE) reduced from 20.52% to 13.68%, return on assets (ROA) decreased from 1.80% in 2010 to 1.06% in 2014, and the capital adequacy was 11.25% against required ratio of 10%.

10. The City Bank Ltd. incorporated as private commercial bank in March 1983. The bank had an IPO in 1986 and was listed in both DSE and CSE. The bank provides a comprehensive range of financial services including commercial banking, consumer banking, trade services, SME, retail, custody, and clearing services for retail and corporate customers. Risk Management is adequate with the formulation of a Risk Management Committee focused on reviewing existing and potential risks in all areas of banking including credit risk, operational risk, money laundering risk, interest and liquidity risk, internal control and foreign exchange risk. Corporate governance is adequate, with financial reporting and disclosures compliant with applicable laws and regulations, a 14-member Board of Directors including a Managing Director and/or Chief Executive Officer (CEO), Vice Chairperson and one independent director. The paid-up capital reached Tk8,340.9 million out of an authorized capital of Tk10,000 million at the end of December 2014. Total shareholding of directors, the general public, and financial institutions are 31.42%, 46.68%, and 21.90%, respectively. Based on financials up to 31 December 2014 and other relevant information, CRAB upgraded its long-term rating from A3 to AA2 and retained its short-term rating at ST-2, reflecting the bank’s strength in risk weighted capital adequacy and profitability in terms of net interest margin. 11. Mutual Trust Bank Limited (MTBL) is a public limited company, incorporated in 1999 as a bank under the Companies Act 1994. It started commercial operation in 1999 and listed with DSE and CSE in 2003. The credit disbursed for corporate financing (78%), SME Loan (9%), retail banking (3%), secured overdraft (4%), employee (1%), and margin loan (5%) of credit portfolio of Tk77,141 million as of 31 December 2014. The sponsors of the company hold 44.5% of total share of paid-up capital of Tk3,078 million. The remaining 55.5% was held by financial institutions (25%) and the general public (30.5%). The 13-member Board is led by the Chairman, and the Managing Director as ex-officio director. The Board is mandated for policy issues and review of company performance. The Board formed the Executive Committee, Audit Committee, Disciplinary Committee, Risk Management Committee, Asset Liability Committee, Management Committee, Credit Evaluation Committee, Promotion and/or Recruitment Committee, and Purchase Committee. The Auditor declared that the bank has complied with the conditions of corporate governance guidelines for 2014. MTBL records its SME lending

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separately. It has an individual SME division and has 104 branches, including 14 SME and/or agriculture-dedicated branches. The 5-member Risk Management Committee has taken various steps to identify risks, which are related to the lending, trading, and operating activities of the bank. MTBL could reduce its NPLs by 0.95% in 2014 which was 2.67% as of 31 December 2014. CRISIL assigned AA- rating to MTBL in the long term and ST-2 in the short term as of 23 June 2013. Net operating profit has decreased slightly from Tk988 million in 2010 to Tk962 million in 2014; while return on average equity (ROAE) has reduced from 24.5% to 15.7% in 2014. Return on average assets (ROAA) also reduced from 1.8% in 2010 to 0.9% in 2014. The capital adequacy was 10.8% as of 31 December 2014 against the required ratio of 10%. 12. Dhaka Bank Limited (DBL) is a public limited company incorporated in 1995 as a bank under the Companies Act 1994. It started the commercial operation in 1995 and listed with DSE and CSE in 2000. The credit portfolio of the company was Tk103,132 million as of 31 December 2014 that disbursed for term loan (33%), short-term loan (60%), housing (1%), lease finance (2%), and bills purchased and discounted (2%). The directors of the company hold 45% of paid-up capital of Tk5,685 million as of December 2014. The remaining 55% are held by financial institutions (20%), and the general public and others (35%). The 18-member Board is led by the Chairman, and the Managing Director as ex-officio director. The Board is mandated for policy issues and review of company performance. The Board formed the Executive Committee, Audit Committee, Shari’ah Committee, Management Committee (all Risk Management Committee, Asset Liability Committee, and Human Resources Committee), promotion and/or Recruitment Committee, and Purchase Committee. The bank complied with the conditions of corporate governance guidelines for the year ended 31 December 2014. DBL records its SME lending separately. It has an individual SME division. The classified loan of 5.3% was identified as of 31 December 2014. CRISIL assigned AA- rating to DBL in the long term and ST-2 in the short term based on the information as of 23 June 2013. DBL’s ROE has reduced from 16.2% to 15.9% in 2014. The ROA also reduced from 1.4% in 2010 to 1.3% in 2014. The capital adequacy was 11.2% as of 31 December 2014 against the required ratio of 10%. 13. Dutch-Bangla Bank Limited (DBBL) was incorporated as a joint venture bank between local shareholders spearheaded by the founding Chairman M. Shaabuddin Ahmed and the Dutch company—the Netherlands Development Finance Company. The focus of the bank is to finance high-growth manufacturing industries in Bangladesh. Its Board comprises 7 members including a Chairman, 2 independent directors, and one Managing Director. Its authorized capital is Tk4,000 million of which $2,000 million is paid up. The bank is 87% owned by its sponsors and 13.0% owned by the general public. The ultimate responsibility for effective risk management lies with the Board of Directors, but through the Board’s Audit Committee, Executive Committee, and Risk Management Committee principles and limits are set, and operations are within approved systems and procedures. Credit policy is approved by the Board, approvals are delegated properly with proper checks and balance in place, there are independent credit risk management division, and separate credit administration, monitoring and recovery, and management recovery committee. Credit operations are subject to independent internal audit. For the year 2013, CRAB rated DBBL as AA1 in the long term and retained ST-1 in the short term. 14. Islamic Finance and Investment Ltd. (IFIL) is a public limited company incorporated in 2001 as a nonbank financial institution (NBFI) under the Companies Act 1994. It started commercial operation in 2001 and listed with DSE and CSE in 2005. The credit portfolio of the company was Tk6,077 million as of 31 December 2014. IFIL broadly categorized its investment in lease financing (46%); hire purchase sherkatul Melk (41%); bai muajjal (trade financing) 13%; and Baim household durable scheme (0%). The directors of the company hold 37.9%. The

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remaining 62.1% are held by financial institutions (22.6%), and general public (39.5%) of total share of paid-up capital of Tk1,163 million as of 31 December 2014. The 12-member Board is led by the Chairman, and the Managing Director as ex-officio director. The Board is mandated for policy issues and review of company performance. The auditor has certified its compliance of corporate governance that the company has complied with the conditions of corporate governance guidelines. IFIL finances in manufacture, trade, agriculture, non-farm activities, and service industries through machinery, raw material, goods, commodities, and fixed asset purchase to SME depending on the needs of customer. As categorized by BB, IFIL takes care of credit risk, foreign exchange risks, asset and liability management risks, money laundering ad establishment of internal and compliance. The Management Committee oversees the activities of the Risk Management Committee. The identified classified loan of IFIL was Tk430 million (7% of portfolio) as of 31 December 2014. Based on information of financial statements as of 31 December 2014, CRAB rated IFIL credit as A3 in the long run and ST-3 in the short run. Net operating profit of IFIL has increased from Tk124 million in 2010 to Tk193 million in 2014; while ROAA decreased from 3.1% in 2010 to 2.8% in 2014; and ROE decreased from 17.4% in 2010 to 13.4% in 2014. The capital adequacy was 30.86% as of 31 December 2014 against the required ratio of 10%. 15. First Security Islamic Bank Ltd (FSIBL) is a public limited company incorporated in 1999 as a bank under the Companies Act 1994 and started commercial operation in 1999 listed with DSE and CSE in 2008. The credit portfolio of the company was Tk152,792 million as of 31 December 2014 that was disbursed in agriculture (1.4%), textile and readymade garments (22.6%), internal trade finance (55.2%), housing (9.5%), and special program (11.3%). The directors of the company hold 49.3% of shares and the remaining 50.7% are held by financial institutions (14.1%), non-resident Bangladeshi (0.3%), foreign investors (1.2%), and general public (35.1%) of total share of paid-up capital of Tk4,114 million as of December 2014. The 12-member Board is led by the Chairman, and the Managing Director as ex-officio director. The Board is mandated for policy issues and review of company performance. The auditor certified that the bank complied with the conditions of corporate governance guidelines. FSIBL finances in manufacture, trade, and service industries all over the country through its 137 branches. The 3-member Risk Management Committee of FSIBL is responsible for identifying, measuring, monitoring, and controlling various types of risks for ensuring the health of a bank as well as the whole financial systems. The identified classified loan of FSIBL was Tk3,397 million as of 31 December 2012 which is 2.2% of total credit portfolio. The Emerging Credit Rating Limited (ECRL) assigned A+ rating in the long term and ECRL-2 in the short term based on the audited financial statements as of 31 December 2013. The net operating profit of FSIBL has increased from Tk549 million in 2010 to Tk649 million in 2014; while ROA also decreased from 1.9% in 2010 to 0.4% in 2014. The capital adequacy was 11.7% as of 31 December 2014 against the required ratio of 10%. 16. Bangladesh Development Bank Ltd. (BDBL) is a state owned public limited company by shares incorporated in 2009 as a bank under the Companies Act 1994. BDBL was formed by amalgamation of former Bangladesh Shilpa Bank, and Bangladesh Shilpa Rin Sangstha—2 development financial institutions in the public sector. It started operation in 2010, and listed with DSE and CSE. The credit portfolio of the company was Tk16,501 million as of 31 December 2014 that was disbursed in cash credit (hypothecation and pledge), working capital, secured advance, overdraft, and retailed banking. The Government owns 100% of its share of paid‒up capital of Tk4,000 million as of December 2014. The 9-member Board is led by the Chairman and the Managing Director as ex-officio director. The Board is mandated for policy issues and review of company performance. BDBL was established for financing in manufacture, trade, and service industries all over the country through its 30 branches. The

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identified classified loan of BDBL was Tk5,248 million as of 31 December 2014 which is 32% of total credit portfolio. CRISIL assigned AAA rating in the long term and ST-1 in the short term on 30 June 2014. The net operating profit was Tk1,449 million in 2014; while ROA was 2.3%. 17. FAS Finance & Investment Fidelity Assets and Securities (FFIL) is an NBFI formed under the Financial Instructions Act 1993 incorporated in March 1997 and was registered as a merchant bank with the Bangladesh Securities and Exchange Commission in January 1998 converted into a public limited company in August 2001. BB provided its license for leave financing operation in September 2001 and had an IPO in 2008. FFIL is listed in both DSE and CSE. FFIL activities include medium and long-term financing i.e. lease financing, transport financing, project financing, house financing, SME refinance, working capital finance, for retail and corporate customers. As FYE2014, FFIL shareholding is 47.79% by Bangladeshi sponsors, 1.21% by financial intuitions, and 40.99% by the general public. The Board consists of 15 members including a Chairman, Vice Chairman, Managing Director and CEO, Company Director, 2 independent directors, and 9 other directors. As of May 2015, FFIL was not in full compliance with BSEC corporate governance requirements having less than 1/5 the required independent directors. FFIL’s Credit Risk Management Division, segregated into credit approval, administration, monitoring and recovery units manages credit risk through thorough risk assessments before any credit facility is sanctioned. Accounts Department under the CEO manages liquidity risk while the Internal Control and Compliance Division, and Audit Committee review the operations and compliance with statutory requirements. FFIL has one subsidiary—FAS Capital Management Ltd. As on April 2014, CRAB rated the FFIL as BBB2 in the long term and ST3 in the short term. 18. United Leasing Company Limited. Now renamed as United Finance Limited (UFL), the United Leasing Company Limited is a public limited company incorporated in 1989 under the Companies Act 1993. Its authorized capital is Tk120 million, of which Tk62.50 million is paid up. It is listed in Dhaka Stock Exchange and Chittagong Stock Exchange. Their business consists of lease financing, affordable home loan, and term financing covering 80% of credit portfolio, and agricultural credit for crop production and cattle rearing covering 20%. The company’s shareholding is 53% held by the sponsor groups and 47% institutional investors and general public. The Board of Directors is led by the Chairman, the managing director as ex-officio director, Chief financial officer, company secretary, and six directors from three business organizations (Lawrie Group Plc., UK; United Insurance Company Limited; and Surmah Valley Tea Company Limited). Credit committee, asset liability management committee, collection feedback committee were established to monitor and strengthen the business operations. UFL has sufficient credit risk management tools. Although there is no designated SME product line, its term loan products cater to the SME sector by offering collateral free long-term loans. As of 31 December 2014, total credit portfolio of UFL was Tk10,727 million, of which SME portion was Tk4,367 million (40.7%), including SME to women entrepreneurs amounting to Tk202 million (4.6%). There are SME dedicated desks, and women desks in its all 18 branches. UFL’s last credit rating was an A+ in the long term from Crisil in May 2008. Though not mandatory, a new rating is to be completed by December 2015. Company’s net profit was TK324 million for calendar year 2014. Capital adequacy was 20%.