chapter 2siteresources.worldbank.org/psglp/resources/chap2.pdf · 41 in terms of domestic credit as...

Chapter 2

Supply of and Demand for Financial Products

47

40 Prepared by Dr. Md. Akhtaruzzaman, Senior Research Economist, Dr. Md. Habibur Rahman, Senior Research Economist and Md. Julhasuddin, Joint Director with special assistance from Iftekhar A. Robin, Assistant Director.41 In terms of domestic credit as well as money supply to GDP ratio (40 percent and 41 percent respectively) and low stock market capitalization to GDP ratio (around 6 percent) as of June 2005, are all significantly below in India and Pakistan.42 However, Dutch-Bangla Bank Ltd. (a private commercial bank), has started paying interest on this type of account from the first quarter of FY03.

2.1 Background 40

An efficient financial system will provide a reliable and inexpensive money transfer mechanism within the country and cross-border as well. Entrepreneurs will have access to a range of sources of funds for their working and fixed capital formation; affordable mortgage and consumer finance will be available to households. They will have opportunities to utilize investible funds in the best possible productive way. However, in terms of development and efficiency, Bangladesh’s banking system is not at a level as that in the developed countries of the world. In fact, it is not long when Bangladesh’s banking system started to modernize its services. After allowing private sector banking in the early 1980s, the government launched a comprehensive financial sector reform program (FSRP) in 1990. Thus it is only recently that Bangladesh’s banking system has been attaining momentum in improving and modernizing its services. The financial sector of Bangladesh is still characterized by low monetization and low capitalization.41

2.2 Payment and Transaction Products

Depending on the types of accounts total demand and time liabilities of the scheduled banks in Bangladesh can be divided into fourteen categories (Table 2.2.1). Depositors are basically interested to keep their deposits in various interests bearing term and savings type of accounts. Since current / chequing types of accounts are generally non-interest bearing people are less interested to keep their money in such accounts.42 While the amounts kept in fixed and savings deposits were respectively 36.3 percent and 27.0 percent of total deposits, only about ten percent of total deposits were maintained as current/chequing deposits as of end of June 30, 2005.

Chapter 2 (Continued)

48

43 This bank has been taken-over by another foreign owned Standard Chartered Bank Ltd. in the year 2000, which is now the largest FCB in Bangladesh.

Types of Accounts

1. Current / Chequing Deposits

2. Deposits withdraw able on Sight

3. Savings Deposits

4. Convertible Taka Accounts of Foreigners

5. Foreign Currency Accounts

6. Wage Earners’ Deposits

7. Resident Foreign Currency Deposits

8. Short Term Deposits

9. Fixed Deposits

10. Deposit Pension Scheme

11. Margin Deposits (Foreign Currency / BDT)

12. Special Purpose Deposits

13. Negotiable Certificates of Deposits

14. Restricted (Blocked) Deposits

Total

% of Total Deposits

10.18

1.68

27.00

0.12

0.33

0.54

1.00

8.56

36.32

10.10

1.05

2.43

0.68

0.02

100.00

Table 2.2.1Percentages Distribution of Total Deposits of Scheduled Banks

Source: Scheduled Banks Statistics, Bangladesh Bank

As of end June 2005)

Percentages distribution of total deposits of the scheduled banks in Bangladesh as of end June 2005 may be seen in Table-2.2.1. It may be mentioned that in February 2006 annual interest rates of total 48 banks ranged from 2.50 to 7.00 percent for savings and 5.25 to 12.00 percent for fixed deposit accounts.

One of the essential functions of a typical bank is to provide financial services to facilitate payments and transactions. The depth and coverage of the payments and transaction products of the banking system in Bangladesh have been getting momentum with a clear indication of the declining share of the NCBs overtime. Foreign and local private commercial banks are now providing various modern services to their customers. During the late 1990s the ANZ Grindlays Bank, a foreign private bank, first introduced the ATM facility in Bangladesh.43 By the year 2005, most of the private commercial banks have provided the ATM facility to their customers. Debit and Credit Card facilities are now available with most of the local and foreign private banks. But NCBs and the state-owned SBs are lagging behind in providing modern services to their customers.

44 The survey comprises of 29 out of 48 banks and SBs.


49

All Banks (29 of 48) End Dec. 2001 [a] End Dec. 2005 [b] Change [b-a]

Chequing 50.8 42.9 -7.9

Wire Transfer 49.0 49.1 0.1

Debit/Credit Card 0.2 8.0 7.8

Total 100.0 100.0 --

Table 2.2.2Share of Total Volume of Transactions by Type of Services (percent)

Source: BRPD, BB & replies from the respective banks.

Out of 4 NCBs, only 2 have ATM facility, while none of the state-owned 5 SBs have any ATM facility. Along with the introduction of online banking some foreign and local commercial banks have introduced some new payment and transaction services, such as ‘Financial Kiosk’, ‘Bills Pay Center’, ‘Call Center’ etc. They are now providing 24-hour basic banking services through these technology-driven channels, limited to the two big metropolitan areas, i.e., in the capital city of Dhaka and in the main port city Chittagong.

Based on a very recent survey conducted by PAU regarding transactions and payments of different financial products by the banking system in Bangladesh, it may be noted that although the absolute volume of transactions under chequing accounts grew about 14.4 percent, the percentage share of the chequing accounts is declining overtime.44 It has been observed from the survey data that while the percentage share of transactions through chequing accounts decreased by about 8 percent, transaction through debit and credit card increased by the same percentage (8 percent) during 2001 to 2005. During this 5-year time span, however, the percentage share of Wire transfer remained same at about 49 percent. It is worthwhile to mention that the role of SBs is very disappointing in terms of its negligible share in total volume of transactions as well as in providing other financial services (Table 2.2.2 and Figure 2.2.1).

The survey data also indicates that the share of NCBs (2 out of 4) in all broad categories of transactions, namely chequing accounts, wire transfer and transactions through debit/credit cards declined while the shares of PCBs (20 of 30) and FCBs (6 of 9) have increased substantially reflecting better competitive environment in the financial sector in Bangladesh during 2001-2005. Likewise, as of end-March 2006, the relative depth of ATM penetration is dominated by PCBs and FCBs (Table 2.2.3, 2.2.4 and Figure 2.2.2). The overall industry shares (in terms of assets), it may be noted, are roughly 47 percent (NCBs/SBs), 46 percent (PCBs) and 7 percent (FCBs).


50

0 20 40 60

End Dec. 2001

End Dec. 2005

(in %)

Chequing Wire Transfer Debit/Credit Card

Figure 2.2.1 Share of Total Volume of Transactions (percent)


Figure 2.2.2Share of ATM Penetration by Major Bank Groups (percent)

NCBs (3%)

FCBs (22%) PCBs (75%)


1 NCBs (2 of 4) 16741.37 21834.49 7.61 9747.68 13323.53 9.17 7.76 61.11 171.882 PCBs (20 of 30) 6342.22 13125.01 26.74 11401.59 16245.45 10.62 33.07 7094.40 5338.173 FCBs (6 of 9) 2701.88 5727.71 28.00 3715.38 17065.15 89.83 80.80 464.06 118.584 SBs (1 of 5) 23.55 30.34 7.21 Nil Nil Nil Nil Nil Nil

5 Total (29 of 48) 25809.02 40717.55 14.44 24864.65 46634.13 21.89 121.63 7619.57 1541.14

Source: BRPD, BB & replies from the respective banks. Note: * Annualized.

Growth(annualized)

as on31.12.01

as on31.12.05

Growth(annualized)

as on31.12.01

as on31.12.05

Growth(annualized)

as on31.12.01

as on31.12.05

Volume of Transactions inDebit and Credit Cards

Sl.No.

Banks'Category Deposit in Chequing Accounts Volume of Wire Transfer

Table 2.2.3Trends in the Volume of Transactions ( in crore BDT)

45 This section has been prepared by Md. Ezazul Islam, Research Economist who has been assisted by Iftekhar A-Rabin, Research Officer.


51


as on31.12.01

as on31.12.05

as on31.12.01

as on31.12.05

as on31.12.01

as on31.12.05

Volume of Transactions inDebit and Credit Cards

Sl.No.

Banks'Category Deposit in Chequing Accounts Volume of Wire Transfer

Table 2.2.4Trends in the Share of Transactions by Major Bank Groups (Percent)

( in crore BDT)

1 NCBs 64.87 53.62 39.20 28.57 6.38 0.80 (2 of 4) 2 PCBs 24.57 32.23 45.85 34.84 27.19 93.11 (20 of 30) 3 FCBs 10.47 14.07 14.94 36.59 66.43 6.09 (6 of 9) 4 SBs 0.09 0.07 Nil Nil Nil Nil (1 of 5)

5 Total 100.00 100.00 100.00 100.00 100.00 100.00 (29 of 48)

Conclusion

It is already an established fact that the development and efficiency of payments and transaction products are primarily responsible for enhancing the depth and breadth of financial sector in terms of delivering their financial services. Analysis shows that there has been a considerable improvement in terms of increased role of the private sector banking in providing financial payments and transactions products in Bangladesh. Nonetheless, efforts need to be put in the state-owned NCBs/SBs, which still control a lion’s share of the industry’s deposit and assets, to introduce modern means of payments and transaction products in near future.

2.3 Saving Products 45

Commercial banks in the Bangladesh financial system offer a good number of saving products for deposit mobilization. The major saving products are savings deposits, short term deposits, fixed deposits of various duration, pension scheme deposits and others including certificates of deposit. Commercial banks mainly NCBs introduced the pension deposit scheme in 1983. Traditionally these pension scheme deposits bear high interest rates. Late in the 1990s, deposit pension scheme products were suspended by the scheduled banks in order to reduce their interest liability. But, in order to mobilize additional deposits different scheduled banks including private commercial banks (both local and foreign) reintroduced pension deposit scheme offering lower interests. Similar instruments are Agrani Bank


52

Composition of Savings as on of September 2005.

Savings 27%

Short Term11%

Fixed 38%

PensionDeposit

10%

Others14%

Figure 2.3.1 Share of Different Type of Deposits as of 2005

Source: Scheduled Bank Statistics, Bangladesh Bank, various issues.

Source: Scheduled Bank Statistics, Bangladesh Bank (various issues).

Table 2.3.1 Trend in Year-on-Year Growth in Different Categories of Savings Deposits

Savings Short Fixed Pension Others Total Term Deposit

2001 14.4 7.8 16.9 18.0 15.5 14.92002 10.9 12.4 18.4 15.0 7.4 13.42003 8.0 17.9 18.5 11.9 6.5 12.82004 15.7 13.2 19.1 15.8 13.2 16.32005 10.5 18.7 18.6 17.7 25.2 17.1

Pension Scheme (APS), Special Deposit Pension Scheme (SDPS), Special Pension Scheme (SPS), Special Purpose Deposits (SPD), Pension Scheme Savings (PSS) and Hajj Deposit Scheme (HDS).

In terms of maturity and purpose, the various types of savings products have developed over time in the financial system of Bangladesh. These savings products may be divided into a broader group viz: savings, short term, fixed, pension and other deposits. Fixed deposits, which generally enjoy the highest share in the deposits, maintained a higher growth about 17-19 percent during the last five years. Pension and short term deposits also have grown briskly over time. The growth rate and share of the deposits are presented in Table 2.3.1 and Figure 2.3.1 respectively.

In terms of maturity, banks divided the fixed deposits into different categories viz. for 3 months to less than 6 months, 6 months to less than 1 year, 1 year to less than 2 years, 2 years to less than 3 years and for 3 years and above. It is evident that 1 year to less than 2 years category deposits constituted the highest share in the fixed deposits. As on September 2005, the share of this category was about 38 percent.


53

0

5

10

15

20

25

30

2001 2002 2003 2004 2005

NCBs DFIs FCBs PCBs Total

Figure: 2.3.2Trend of Nominal Deposits Growth (Year-on-Year) by Type of Banks

Source: Scheduled Banks Statistics, Bangladesh Bank, various issues.

Table 2.3.2Nominal Deposits Growth Mobilization by Type of Banks

Year NCBs SBs FCBs PCBs Total

2001 13.32 20.91 17.15 28.58 18.472002 9.81 16.91 8.47 25.10 14.952003 8.87 9.82 6.75 22.37 13.402004 8.29 21.74 10.37 25.61 16.272005 9.44 12.72 21.39 24.70 17.09

The growth of deposit mobilization by type of banks shows a mixed trend during the last five years. After decelerating trend in deposits growth during the period of 2001-2003, the total deposits increased by 17.09 percent in 2005 from 13.40 percent in 2003. Even in real terms, the typical industry growth has been in double digits over the last five years. Deposit mobilization by type of banks indicates that deposits growth of PCBs is much higher than that of NCBs. It is noteworthy that the share of NCBs to the total deposits has been declining over time. The share of NCBs in deposits declined to 41 percent in 2005 from 53 percent in 2001. While the share of PCBs increased to 46 percent in 2005 from 34 percent in 2001. Although the shares of SBs and FCBs in the deposits are small, growth of deposits has depicted much faster than that of the NCBs during the last tow years (Table 2.3.2 and Figure 2.3.2).

Total deposit mobilization as a percentage of GDP by the banking system has been growing over time. The ratio was 29.61 percent 1990 which grew to 39.27 in 2005. The ratio of deposit to GDP is shown in Figure 2.3.3.


54

0.005.00

10.0015.0020.0025.0030.0035.0040.0045.00

1990 1994 1995 1999 2000 2001 2002 2003 2004 2005Perc

enta

ge o

f G

DP

ratio

Figure 2.3.3Trend of Deposits GDP Ratio in Bangladesh

15202530354045505560

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Bangladesh India PakistanSri Lanka Indonesia

Figure: 2.3.4Trend of Deposits GDP Ratio for some Asian Countries

Source: International Financial Statistics, Yearbook, 2005.

Table 2.3.3Trend of Deposits-GDP Ratio for some Asian Countries

Year Bangladesh India PakistanSri LankaMalaysiaIndonesiaThailand

1993 22.72 36.45 31.67 25.61 69.29 39.23 72.451994 24.83 36.98 32.94 26.36 67.28 40.40 71.071995 24.71 34.11 30.83 32.53 72.42 43.98 72.061996 25.29 35.76 33.87 32.02 72.94 48.42 73.931997 25.48 38.41 36.71 32.34 78.93 51.45 84.461998 25.82 40.22 35.60 32.02 81.20 55.51 95.231999 27.13 42.31 33.00 33.44 90.92 53.00 94.332000 29.78 46.10 27.90 33.45 88.62 48.21 93.852001 32.17 48.62 29.06 34.36 93.01 45.57 93.452002 34.22 52.66 32.67 34.57 90.44 43.03 89.472003 35.42 52.90 35.16 35.90 91.18 42.01 85.812004 37.11 55.10 37.93 37.40 97.59 40.11 80.89

The data for saving deposits ratio for some Asian countries are presented in Table 2.3.3 and Figure 2.3.4. It clearly indicates that deposits GDP ratio of Bangladesh was higher than that of Pakistan during 2000-2003 and the ratio was almost same as that of Sri Lanka in last three years.

46 This section has been prepared by Shamim Ahmed, Research Economist.47 See Kazemi (1998).


55

2.4 Loan Products 46

a. Evolving Sectoral Pattern of Lending in the Economy

The banking system governed by the BB comprises of a substantial share of assets of the financial sector of the country. Presently, the system consists of 4 NCBs, 5 SBs, 30 domestic PCBs including 6 IBs, and 9 FCBs with a total number of 6,350 branches including 10 overseas branches. Out of the 5 SBs, BKB and RAKUB have been launched in order to meet the credit demands of the agricultural sector, BSB and BSRS are for extending term loans to the industrial sector, and finally, BASIC Bank Limited is for providing loans to the small scale and cottage industries of the economy. In recent years, the banking sector in general has demonstrated risk averse rather than risk-prone lending behavior following the Financial Sector Reform Program of 1990s, as evidenced by absence of any boom in say, consumer lending or speculative property lending.47 There are concerns however that all the credit need for different economic purposes are not being well met.

Figure 2.4.1 and 2.4.2 show the quarterly trend of scheduled banks’ outstanding credit (i.e., sum of advances and bills) for the period between January-March 1999 and July-September 2005. Over this time period, it is revealed that the outstanding credit of scheduled banks in aggregate level followed an increasing trend. This observation is also consistent when outstanding credit is considered in terms of individual bank groups (i.e., NCBs, SBs, FCBs, PCBs (including IBs), and IBs). The rise in the outstanding credit of scheduled banks is mainly driven by the growth in advances originated primarily from higher economic activities. In addition, if outstanding credit of individual bank groups as a share of total outstanding credit is considered, an indicative trend can be observed. In particular, the shares of NCBs and SBs follow a declining trend although their outstanding credit in terms of volume (i.e., BDT in billion) follows an increasing trend and PCBs (including IBs) alone has the highest share of close to 50 percent. Finally, the credit-deposit ratio of scheduled banks excluding the SBs has increased to 0.88 in June 2005 from 0.86 as of end June 2004 which, in turn, indicates a higher credit demand and accelerated economic activities in the country. On the contrary, the share of FCBs, PCBs (including IBs) and IBs alone follow an increasing trend which in turn demonstrates their increasing participation in the credit market. Moreover, these major bank groups have created a competitive environment for the banking system in the country. It is important to mention that with some exceptions,


56

Figure 2.4.1Scheduled Banks Outstanding Credit (BDT in billions)

Source: Banking Statistics Division, Statistics Department, Bangladesh Bank, Head Office, Dhaka.

0

200

400

600

800

1000

1200

Jan-

Mar '9

9

Jul-S

ep '9

9

Jan-

Mar '0

0

Jul-S

ep '0

0

Jan-

Mar '0

1

Jul-S

ep '0

1

Jan-

Mar '0

2

Jul-S

ep '0

2

Jan-

Mar '0

3

Jul-S

ep '0

3

Jan-

Mar '0

4

Jul-S

ep '0

4

Jan-

Mar '0

5

Jul-S

ep '0

5

BDT

in b

illio

n

NCBs SBs FCBs PCBs (including IBs) IBs All Banks

Jan-M

ar '99

Jul-Se

p '99

Jan-M

ar '00

Jul-Se

p '00

Jan-M

ar '01

Jul-Se

p '01

Jan-M

ar '02

Jul-Se

p '02

Jan-M

ar '03

Jul-Se

p '03

Jan-M

ar '04

Jul-Se

p '04

Jan-M

ar '05

Jul-Se

p '05

0

10

20

30

40

50

60

NCBs SBs FCBs PCBs (including IBs) IBs

Figure 2.4.2Scheduled Banks Outstanding Credit (as percent of total outstanding credit)

Source: Banking Statistics Division, Statistics Department, Bangladesh Bank, Head Office, Dhaka.

FCBs generally have the tendency to avoid unattractive locations, although it is considered socially desirable. With regard to SMEs, since PCBs and FCBs have taken initiatives in recent years, it is premature to attempt a comparative analysis.

b. Sectoral Pattern of Advances

Figure 2.4.3 shows the quarterly growth trend of advances of scheduled banks by economic purposes in the private sector for the period between

48 Quarterly growth rate refers to growth over the same quarter of the previous year.49 Quarterly growth rate refers to growth over the previous quarter.


57

July-September 2004 and July-September 2005.48 In this criterion, a mixed picture is observable. Particularly, the quarterly growth rate of advances for agricultural purposes follows more or less a seasonal trend, though it is clear that credit growth has slipped of late. It is also noticeable that the growth rate of advances in the private sector for construction purposes follows an increasing trend while working capital financing follows a marked declining trend over the years. Moreover, construction had the highest growth in attracting advances from scheduled banks in the private sector as of the most recent date depicted in Figure 2.4.3. It is worth mentioning that transport and communication in private sector had no growth at all in July-September quarter of 2004.

If total advances (i.e., both public and private) in real terms by economic purposes are considered, it can be observed that all the sectors follow a stable pattern, except that advances for working capital financing had the highest share in total advances starting July-September quarter of 2004 (Figure 2.4.4). Moreover, in recent years advances to households for flat purchase, consumer goods (motor car/motor cycle, television, refrigerator, computer, etc.) purchase, purchase through credit cards, and educational expenses in real terms follow an upward trend (Figure 2.4.5). In particular, purchases through credit cards have increased in recent years with a quarterly growth rate of 5.08 percent and 6.32 percent in January-March and July-September quarter of 2005 respectively.49

0

10

20

30

40

Jul-Sep'04 Oct-Dec'04 Jan-Mar'05 Apr-Jun'05 Jul-Sep'05 Oct-Dec'05

Agriculture Industry (excluding working capital)Working Capital Financing ConstructionTransport and Communication

Figure 2.4.3Scheduled Bank Advances (Private Sector)

Growth Rate (in percent) by Economic Purposes

Note: In the above figure, quarterly growth rate refers to growth over the same quarter of the previous year.Source: Banking Statistics Division, Statistics Department, Bangladesh Bank, Head Office, Dhaka.


58

020406080

100120140160180

Oct-Dec'03

Jan-Mar'04

Apr-Jun'04

Jul-Sep'04

Oct-Dec'04

Jan-Mar'05

Apr-Jun'05

Jul-Sep'05

Agriculture Industry (excluding working capital)Working Capital Financing ConstructionTransport and Communication

Figure 2.4.4Classification of Advances (in real terms) by Economic Purposes (BDT in billion)

Note: Quarterly advances in real terms by economic purposes have been calculated from advances in nominal terms by using GDP deflator (base: 1995-96=100) constructed by

Shamim Ahmed and Md. Ezazul Islam.Source: Banking Statistics Division, Statistics Department, Bangladesh Bank, Head Office, Dhaka.

0

500

1000

1500

2000

2500

Oct-Dec'03 Jan-Mar'04 Apr-Jun'04 Jul-Sep'04 Oct-Dec'04 Jan-Mar'05 Apr-Jun'05 Jul-Sep'05

Consumer Goods, Purchase throughCredit Cards, and Educational Expenses

Flat Purchase

Figure 2.4.5Advances (in real terms) for Specific Purposes to Households (BDT in million)

Source: Banking Statistics Division, Statistics Department, Bangladesh Bank, Head Office, Dhaka. Note: Quarterly figures in real terms have been calculated from respective nominal figures by

using GDP deflator (base: 1995-96=100) constructed by Shamim Ahmed and Md. Ezazul Islam.

c. Conclusion

In recent years, outstanding credit of scheduled banks in aggregate level as well as for most individual bank groups level followed an increasing trend, which in turn demonstrates their increasing participation in the credit market of the country. NCBs as a group have maintained a steady level of total outstanding credit though both in real terms or as a share of the industry, it has fallen off. The rise in the outstanding credit of scheduled banks is mainly accelerated by the growth in advances originated primarily

50 The interpretation of the banking system as a segmented market is pursued in Chapter 3 (section 3.2 and 3.3).51 Prepared by Mainul Islam Chowdhury, Research Economist.


59

0

10

20

30

40

50

60

FY02 FY03 FY04 FY05 FY06:Q1

Fiscal Year

Billi

on T

aka

NCBs PCBs FCBs DFIs NBFIs

Figure 2.5.1Disbursement of Term-lending by Major Bank Groups and NBFIs

Source: Bangladesh Bank Quarterly, Vol 3, No. 1.

from higher economic activities. Moreover, major bank groups especially PCBs have created a competitive environment in their segment of the banking system.50 Finally, outstanding advances (in real terms) for different economic purposes follow a stable pattern with growing importance of working capital for the industrial sector. The increasing participation of the household sector in assessing consumer credit (especially the use of credit card loans), while still modest, is indicative of greater financial intermediation in aggregate consumption.

2.5 Specialized Loan Products51

(a) Term Lending

An efficient financial system facilitates linkage between mobilization and use of resources through different financial products. Banks and other financial institutions can create assets through disbursement of loans and advances in different modes. One such mode is the term loan which has important implications for long term growth. Financial institutions in Bangladesh have a good number of term loan schemes like project loan, house building loan, rural housing loan, loan for house renovation, transport loan, special credit program (for small and cottage industries and others) etc.

Disbursement of term lending to industrial sector in the first quarter of FY06 was 21.2 billion BDT whereas the annual figures for total disbursed term loan in fiscal years 02, 03, 04 and 05 were 36.1, 39.7, 66.8 and 91.1 billion BDT, respectively. The major portion of this lending goes to large


60

02468

10121416

Billi

on T

aka

FY02

:Q1

Q2

Q3

Q4

FY03

:Q1

Q2

Q3

Q4

FY04

:Q1

Q2

Q3

Q4

FY05

:Q1

Q2

Q3

Q4

Transport & Communications Power and Fuel Industry

Figure 2.5.2Level of Project and Infrastructure Financing by Banks (Nominal BDT)

Source: Scheduled Banks Statistics, Various issues.

and medium scale industries. The growth of term lending in FY03, 04 and 05 were 10, 68 and 36 percent respectively. The lion’s share of this disbursement was made by PCBs followed by NBFIs. The share of SBs in long term financing has shrunk to less than 4 percent during the last four years whereas it was over 19 percent in FY95. Term lending by major bank groups and NBFIs are shown in Figure 2.5.1.

(b) Project and Infrastructure Financing

Financing in transport and communication and power and energy sectors are basically included under infrastructure financing. Figure 2.5.2 shows the outstanding loans to transportation and communication and power and energy sectors from the banking system. The transport and communication network in Bangladesh comprises of road, rail and air transport system including post, telecommunication and information technology. The share of this sector in total GDP is 10.01 percent. Growth of this sector in FY05 was 8.09 percent and outstanding bank credit to this sector stood at 1.83 billion BDT in the same fiscal. From the figure it seems that bank lending to this sector remained stable in nominal terms over recent years but outstanding credit to this sector actually decreased in real terms by 4.43 percent between FY02 to FY05. This may be due to the fact that a major portion of financing to rail, road and air transport is done through government’s development programs and not directly linked with bank credit. Power and energy comprises 1.56 percent of GDP. Credit to this sector in FY05 stood at 0.31 billion BDT with an average nominal growth of 30.42 percent over the four quarters of FY05. In line with the increasingly strong demand for power and energy, outstanding credit to this sector grew at a real rate of 83.56 percent between FY02 to FY05.

52 Monetary Policy Review, Policy Analysis Unit, Bangladesh Bank, October 2005, pp 86.


61

0

10

20

30

40

50

60

Billi

on T

aka

FY02 FY03 FY04 FY05

Bank HBFC NBFI

Figure 2.5.3Housing Finance

Source: Scheduled Banks Statistics, Financial Institutions Department, Bangladesh Bank andActivities of Banks and Financial Institutions, Ministry of Finance.

(c) Housing

As mentioned in the Monetary Policy Review of October 2005 there seems to be a strong demand for housing investment caused by many factors like steady growth of GDP and rapid increase in urbanization.52 Figure 2.5.3 shows housing credit by banks, NBFIs and the state owned HBFC. Outstanding lending to the housing sector by banks, NBFIs and HBFC stood at 87.44 billion BDT in FY05. Of the total 58 percent were made by banks, 32 percent by HBFC and the rest 10 percent by NBFIs. From the figure we can see that the share of PCBs and NBFIs in housing finance is increasing while that of HBFC is decreasing. Outstanding credit to housing finance by banks and NBFIs increased, respectively by 41 percent and 88.81 percent in real terms whereas that by HBFC decreased by 14.67 percent between FY02 to FY05. HBFC has different housing loan products like simple loan, group loan - for constructing flats on a plot having multiple owners, loan for flats/apartments, loan for small houses for middle class and lower middle class families, loan for semi-constructed buildings etc. Two NBFIs are also specialized in housing finance and are providing credit for house building, flat purchase, expansion and renovation of houses, housing plot purchase, chamber and office space purchase, mortgage loan against projects etc. The Grameen Bank also provides housing loans for basic shelter housing in rural areas and disbursed 0.9 billion BDT in FY05.

(d) Conclusion

Disbursement of term lending grew at an annual average rate of 38.2 percent over the last three fiscal years and outstanding term lending to the

53 Prepared by Md. Alauddin Majumder, Research Economist.54 Cited in ADB (2004).


62

industrial sector stood at 237.6 billion BDT during quarter 1 of FY06. Growth of term lending was mainly contributed by the PCBs which disbursed 55 billion and 13.3 billion BDT respectively in FY05 and during the first quarter of FY06. Project and infrastructure financing have slowed down by FY05 showing a negative real growth rate of credit to the transport and communication sector as compared to FY02. Though outstanding credit to power and energy sector grew in real terms, its share to total term lending is very small. Banks and NBFIs are increasingly being engaged in housing finance to meet up the growing demand for housing in urban areas. Housing finance by banks and NBFIs grew at an average real rate of 12.4 and 23.7 percent over the last three fiscal years whereas HBFC’s contribution to housing finance decreased over the same period.

2.6 Access to Finance by Small and Medium Enterprises (SMEs)53

(a) Introduction

The SME sector is widely believed to be the potential engine of economic growth in Bangladesh. According to the 2003 National Private Sector Survey of Enterprises in Bangladesh, the SME sector is responsible for around 40 percent of gross manufacturing output, 80 percent of industrial employment, and 25 percent of the total labor force in this economy. The survey estimated that micro, small, and medium enterprises contributed around 20–25 percent of GDP. The sector was found to encompass about 79,754 establishments, of which 93.6 percent were small and 6.4 percent medium.54 Despite its contribution to the economy, the sector, as stated in the 2003 Private Sector Survey, seriously suffers from the limited access to financial services in Bangladesh. The enterprises in this sector are not small enough to get credit facilities from microfinance institutions (MFIs) and at the same time not large enough to get loans from formal financial institutions.

(b) Market Failure in SME Financing

In general, banks show conservative attitude towards financing SMEs. The intention of banks, in this case, is to avoid relatively higher cost and higher risk associated with the SME dealings. Higher cost results from several factors such as smallness of loan size, required intensive monitoring and supervision etc. The risk is higher because of the fact that small and medium entrepreneurs are highly unlikely to comply with the collateral requirements as typically they do not have immovable properties. The crisis of finance in the SME sector is a case of allocational failure of the market.

55 Bangladesh Ministry of Finance (2005).56 ADB (2005).


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Source: Ministry of Finance (2005)

Table 2.6.1Refinancing Facility to Banks/NBFIs for the SME Sector

Banks (n=7) 149.32 626.04 6.63 781.99 1766 219.75

NBFIs (n=8) 23.76 230.09 201.41 455.26 426 17.51

Total 173.08 856.13 208.04 1237.24 2192 237.26

Category Workingcapital

Mediumterm loan

Longterm loan Total

No. ofbeneficiaryenterprises

Portionof World

Bank

Amounts refinanced (in million BDT)

It is, therefore, necessary that the market failure is corrected and the socially optimal resource allocation takes place.

(c) Steps taken by the Government and International Agencies

Identifying SMEs as a priority sector, the government, in cooperation with Bangladesh Bank and different development partners, has initiated a number of measures with a view to making financial services easily

available to this sector. As part of such measures, recently the Bangladesh Bank has introduced a scheme of BDT one billion to offer refinancing facility to scheduled banks and financial institutions against their loans to SMEs.55 Table-2.6.1 illustrates the refinancing facility given to banks and non-bank financial institutions (NBFIs) till April, 2005. Besides, World Bank, under Enterprises Growth and Bank Modernization Program (EGBMP), has provided USD 10 million, and ADB, under SME Sector Development Program (SMESDP), has approved USD 30 million loan in order to extend credit facilities to SME entrepreneurs.56

(d) Present Role of Banks and Other Financial Entities

Recently a number of commercial banks, NBFIs and NGO-MFIs, pursuing the importance of SMEs have come forward with special initiatives of different types. Agrani Bank, for example, has launched, among other, Employment Generation Project for the Rural Poor (EGPRP) and Small Enterprises Development Project (SEDP) in collaboration with some international agencies. A few banks such as the BRAC Bank and the Eastern Bank are currently rendering a special service named SME banking. Leasing companies are also offering attractive products for SMEs. Table-2.6.2 demonstrates the sharp growth of micro enterprise loan made by 4 leading


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Source – Bangladesh Bank

Table 2.6.3 Dynamics of Scheduled Banks’ Term Loan (Yearly Disbursement)

to Small and Cottage IndustriesFigures in million BDT

Bank category 2003 2004 2005NCBs 1272.1 2408.8 4968

PCBs 1928 3011.8 5785.4FCBs 0.00 0.00 0.00DFIs 1120.9 1088.4 1507.2Total 4321 6509 12260.6

Source: Websites of concerned MFI, Note: n.a: not available

Table 2.6.2 Trend of Credit Flows to Micro-Enterprises

Made by Leading MFIs (in million BDT)

Name of MFIs 2001 2002 2003 2004 2005

Grameen Bank n.a. 794.10 1507.76 4278.43 7920.44

BRAC 632.07 1250.67 3614.17 4132.80 5944.77

ASA n.a. n.a 206.72 535.44 667.55

Proshika 71.87 120.28 176.17 183.59 245.98

Total 703.94 2165.05 5504.82 9130.26 14778.74

MFIs (Grameen Bank, BRAC, ASA and PROSHIKA). During the period from 2001 to 2005 total yearly micro-enterprise lending increased by an amazing 2000 percent from BDT 703.94 million to BDT 15161.24 million. More or less the same trend is believed to be true of all the MFIs.

Besides, scheduled banks have a common practice of providing loan for small and cottage industries. A short span dynamics of scheduled banks’ loan activities related to small and a cottage industry is presented by Table-2.6.3. The Table suggests that banks are gradually becoming more inclined to small enterprise financing. The zero figures for FCBs do not necessarily downplay the role of Foreign Commercial Banks in SME financing. They merely indicate the non-existence of loan made by the FCBs in the specific name of small and cottage industries. Indeed several foreign banks are now engaged in SME banking.

(e) Conclusion

However, considering all the financial facilities provided by the government, development partners and various financial entities, it may be concluded that the demand for SME financing has started to receive attention. The growing awareness in the financial community of the sucess of SME Lending is expected to result in major innovations in the near future.

Box – 2.1


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Islamic Financial Techniques

The contemporary practice of financing or investment is based on the principle of interest, which Islam categorically prohibits. The prohibition of interest does not, however, mean that there is a prohibition on earning any return on financing. It is possible, within the Islamic framework, to earn income on financing. The principle on which it may be earned is: for every real economic gain there has to be a real economic cost in return. The application of this principle requires that financing should give something in return in order to earn an income. The only real thing that financing can earn is profit and any real thing that financing can provide in return to justify a profit is bearing the risk associated with the earning of profit that the financing is supposed to earn. Several financing techniques are available which conforms to the above mentioned principle and are discussed below.

Al-Wadiah

In Islamic banking, the principle of Al-Wadiah means, the bank receives money from the clients for safe-custody with the condition to return the money on demand by the customer. Current accounts are opened under this principle. Depositors authorize the bank to use the money at bank’s risk. The customer is not entitled to receive any benefit from the bank.

Mudarabah (Profit sharing)

Profit sharing principle for Islamic business contracts is based on the Mudaraba principle in which the owner of the capital provides funds to the capital-user or entrepreneur for some business or productive activity on the condition that profits generated will be shared between them. The loss, if any, incurred in the normal process or course of business and not due to neglect or misconduct on the part of the entrepreneur is borne by the capital-owner.

Musharakah (Profit and loss sharing principle)

Musharakah is a form of business organization where one or more entrepreneurs approach an Islamic bank to request the financing required for a project. The bank, along with other partners, provides the necessary capital for the project. All partners, including the bank, have the right to participate in the project. They can also waive this right. The profits are

Box – 2.1 (continued)


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to be distributed according to an agreed ratio, which need not be the same as the capital proportion. Losses, however, are shared in exactly the same proportion in which the different partners have provided the finance for the project.

Muzara’a and Musaqat (Output sharing)

Muzara'a is a contract between an owner of a piece of agricultural land and a farmer for farming it in return of a percentage of its crop. In case of bank, bank provides farmers land (which is possessed by the bank itself) for cultivation on crop sharing. Musaqat is one of the variant of Muzara'a. In this case, bank provides farmers orchards, gardens or trees (which are possessed by bank) for harvesting on crop sharing.

Bai Murabaha (Mark up)

By this technique a party needing finance to purchase certain goods gets the necessary finance in the form of a sale contract under which the seller sells certain goods to the buyer at a cost plus an agreed upon profit payable today or on some date in the future in lump-sum or by installments. The profit may be either a fixed sum or based on a percentage of the price of the goods.

Bai Muajjal (Credit sale)

It is a contract in which the seller allows the buyer to pay the price of a commodity at a future date in a lump sum or in installments. The price fixed for the commodity in transaction can be the same as the spot price or higher or lower than the spot price.

Bai Salam (Advance payment)

Bai- Salam is a term used to define a sale in which the buyer of the good makes advance payment (forward buying), but the delivery is delayed until some time in the future. Usually the seller is an individual or a business and the buyer is the bank.

Bai Istisnaa

A contract of acquisition of goods by specification or order where the price is paid progressively in accordance with the progress of a job. An example would be for the purchase of a house to be constructed, payments are made to the developer or builder according to the stage



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of work completed. Istisnaa contract opens the way to a number of new possibilities of business contracts including some forms of futures contract trading of processed commodities, as it permits deferring of both ends of the contract : delivery as well as payment.

Ijara (Lease)

An individual (lessee) short of funds may approach another (lessor) with a surplus (the other party or financier) to fund the purchase of a productive asset and renting that to him on rent-payment basis. If the title of the asset is fully transferred to the user at the end of the period, i.e., lessee become the owner of the asset, then it will be called Hire Purchase or Ijara wa Iqtina.

Hire Purchase under Shirkatul Melk (HPSM)

It is a combination of shirkat (partnership), ijara and sale. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset, own the same jointly, share the benefit as per agreement and bear the loss in proportion to their respective equity, the contract is called Shirkatul Melk contract.

Qard Hasana

This is a zero return type of loan with the stipulation to return the principal amount in the future without any increase. A levy of a modest service charge on such a loan is permissible provided it is based on the actual cost of administering the loan. The loan is often provided to charity institutions for the financing of their activities.

Products Introduced by Islamic Banks in Bangladesh

There are seven full fledged Islamic banks operating in Bangladesh of which one is Foreign Commercial Bank. Besides nine other commercial banks are partially involved in Islamic banking having Islamic banking operation in a total of 19 branches. Different deposit and loan products have been developed by the various Islamic Banks. The following table provides a list of such products.



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Table 1 Deposits and Loan Products of Islamic Banks

Deposit Products Al Wadiah Account, General Mudaraba Account, Term Mudaraba Account, Mudaraba Hajj Savings Scheme, Mudaraba Savings Bond, Mudaraba Special Savings (Pension) Scheme, Mudaraba Foreign Currency Deposit Scheme (savings), Mudaraba Monthly Profit Deposit Scheme, Mudaraba Muhor (Marriage) Savings Scheme, Mudaraba Waqf Cash Deposit Scheme, Mudaraba Education Deposit Scheme, Mudaraba Pension Deposit Scheme, Mudaraba Housing Savings Scheme and Mudaraba Millionaire Savings Scheme, Privileged Citizen Scheme.

Loan Products Bai Murabaha (General, WES L/C, Post Import, Pre-shipment, WES bills), Bai Salam, Bai Muajjal (General, WES bills), Musharaka (General, Pre-shipment, Import), Quard Hasana, Higher Purchase Shirkatul Melk (HPSM), Household Durables Scheme, Housing Investment Scheme, Real Estate Investment Scheme, Transport Investment Scheme, Car Investment Scheme, Small Business Investment Scheme, Agricultural Investment Scheme, Micro industries Investment Scheme, Rural development Scheme and Mirpur Silk Weavers' Investment Scheme, Masjid-Madrasha Investment Scheme, Family Empowerment Micro-Credit Program and Family Empowerment Micro-Enterprise Program.

As of September 2005 total amount of deposits and advances in different Islamic banks amounted to 176857.2 million and 169718.7 million taka respectively which were 26.32 percent and 30.16 percent of the total deposits and advances of Private Commercial Banks respectively. Deposits and advances in all private commercial banks grew at a rate of 5.2 percent and 6.12 percent respectively over the previous quarter whereas the growths were 4.22 percent and 8.5 percent respectively in case of Islamic banks.


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References

Asian Development Bank (2004), “Report and Recommendation of the President to the Board of Directors on Proposed Loans and Technical Assistance Grant to the People’s Republic of Bangladesh for the Small and Medium Enterprise Sector Development Program–November 2004,” available at

http://www.adb.org/Documents/Tranche-Releases/BAN/35225-BAN-PRTR.pdf.

Asian Development Bank (2005), “Bangladesh: Small and Medium Enterprise Development Program”, available at

http://www.adb.org/Documents/Tranche-Releases/BAN/35225-BAN-PRTR.pdf.

Activities of Banks and Financial Institutions, Finance Division, Ministry of Finance, GOB (Various Issues).

Annual Report 2004-2005, Bangladesh Bank.

Bangladesh Bank Bulletin, Bangladesh Bank (Various Issues).

Bangladesh Economic Review 2005, Economic Adviser’s Wing, Finance Division, Ministry of Finance, GOB.

Kazemi, M. A. M. (1998), “Financial Sector Reforms: The Bangladesh Experience,” Country Paper for Economic and Social Council for Asia and the Pacific (ESCAP) Seminar on Improved Management of the Financial Sector, 20-22 May 1998.

Monetary Policy Review (2005), Policy Analysis Unit, Bangladesh Bank, October 2005.

Scheduled Banks Statistics, Bangladesh Bank (Various Issues).

Shahid, A.T.M.A., Banerjee P.K. and Ashraf Al Mamun (2004), “Innovation of Banking Products in Bangladesh,” Bangladesh Institute of Bank Management (BIBM) Seminar Paper.