Report on the Financial Services Industry in Bangladesh

In the dynamic symphony of economic endeavors, the Finance Industry of Bangladesh stands as a resilient crescendo. Amidst financial breakthroughs and diverse fiscal landscapes, this sector plays a vital role in shaping the economic harmony of the nation.

Market Landscape

Comparison of ratio of Credit to Debit of Bangladeshi Banks over the years

Key Facts about the Economy of Bangladesh

Foreign Reserve of Bangladesh Over the Years

Bangladeshi Financial Industry Overview:

Scheduled Banks: 62 entities including 6 State-Owned Commercial Banks (SOCBs) and 43 Private Commercial Banks (PCBs), 3 Specialized Banks, 9 Commercial banks and 1 Digital Commercial Bank
Bank Deposits (April 2024): BDT 16819390 million
Non-Bank Financial Institutions (NBFIs): 34 entities with assets of ৳8.78 trillion (US$97.6 billion).
Non Scheduled Banks: 5 entities

Monetary Policy Tools:

According to the Business Standard, current Statutory Reserve Requirement which is 13%.
Current CRR Rates (February 2024): 4.0% for traditional and Islamic banking, 1.5% for Deposit Taker FIs, and 2.5% for Non-Deposit Taker FIs.
Repo Rate and Reverse Repo Rate (February, 2024): 8.00% and 4.75% respectively.

Non-Performing Loans (NPL) Situation:

According to a report by LightCastle Partners, NPL Ratio (March 2023): 8.8%.
Challenges include inadequate credit appraisal, weak legal system, political interference, and economic slowdown.
Initiatives aim to address challenges through regulations, specialized courts, credit risk management, and loan restructuring.

Stock Market and Bond Market:

Dhaka Stock Exchange (DSE) Broad Index (DSEX): 5518.48 (April 30, 2024). Some sectors, such as pharmaceuticals and FMCG, are performing well, while textiles and banks face challenges.
Challenges in the stock market attributed to global economic concerns and political uncertainty.
Bond market is dominated by government bonds (over 95% of outstanding bonds). Challenges in corporate bonds include limited development and secondary market activity.

Taxation in Financial Industry:

The tax rate for listed banks, insurance companies and NBFIs is 37.5 per cent. It is 40 per cent for the non-listed firms in the same categories.
Special tax exemptions or reduced rates for specific activities like microfinance or green financing.
Government subsidies for interest rates on certain loans (e.g., agricultural loans).
Government guarantees to cover a portion of potential losses on export-related lending.

Trends in Financial Inclusion and Digitalization:

According to a Bangladesh Bank, mobile financial Services (MFS): 22 crore (220 million) users, a rise of 160% over 4 years, with a total transaction value of 129445.47 BDT in January 2024
Digital Merchant Payment of BDT 5769 Crore
FinTech sector experiencing substantial investments and innovation.

Challenges:

Financial illiteracy affects 82% of adults.
Limited access to credit for SMEs and rural populations.

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Value Chain

Business Model

General flowchart describing how the Finance Industry works

Organizations endowed with substantial financial resources actively participate in investment endeavors, strategically deploying their surplus funds into either debt instruments or equity instruments emanating from entities facing fiscal shortfalls. The choices available for these surplus entities include opting to deposit funds within financial institutions like banks or venturing into alternative investment avenues such as National Security Certificates and bonds.

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In the realm of equity investments, surplus units have the option to engage in stock markets, entrust their funds to specialized entities like Asset Management Companies (AMCs), or explore promising opportunities within the dynamic landscape of startup ventures. This discerning allocation of surplus funds underscores a multifaceted and diversified approach to investment, thereby contributing significantly to the overall efficacy and vibrancy of financial markets. This strategic diversification not only enhances financial resilience but also fosters a robust and dynamic investment ecosystem.

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Industry Analysis

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Revenue Drivers

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The revenue of the financial sector majorly depends on:

1. Interest income: This remains the primary source of revenue for most banks and financial institutions, generated through (a) Loan interest: Interest charged on loans disbursed to individuals, businesses, and other entities. (b) Investments: Income earned from investments in government securities, corporate bonds, and other financial instruments.

2. Fee income: Fees charged for various services like: (a) Transaction fees: Account maintenance, cash withdrawals, money transfers, etc. (b) Service charges: Loan processing fees, underwriting fees, trade finance fees, etc. (c) Advisory fees: Investment advice, wealth management services, etc.

3. Foreign exchange: Income earned from buying and selling foreign currencies.

4. Islamic banking income: Profit-sharing models and fee-based structures specific to Islamic financial products.

5. Microfinance: Interest income and fees charged on small loans to low-income individuals and small businesses.

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Cost Drivers

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Major cost drivers of the financial sector are:

‍1. Interest expense: Cost of funds incurred by banks and financial institutions to maintain reserves and borrow money for lending.

2. Employee Benefits: Commissions, benefits, and training costs for staff across various functions.

3. Operational expenses: Rent, utilities, technology infrastructure, marketing, and other overhead costs.

4. Loan impairment charges: Provisions set aside to cover potential losses on non-performing loans.

5. Regulatory compliance costs: Costs associated with adhering to regulations and reporting requirements of Bangladesh Bank.

6. Technology investments: Upgrading and maintaining core banking systems, mobile banking platforms, and other digital infrastructure.

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Porter’s Five Forces

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The Porter’s Five Forces analysis for the Financial industry in Bangladesh are outlined below. These factors impact how businesses compete and conduct business in Bangladesh's Financial sector, hence defining the sector's strategic landscape.

‍1. Threat of New Entrants (Moderate): Regulatory requirements, capital adequacy norms, and technological infrastructure pose moderate barriers. Established players have brand recognition and customer inertia, creating some switching costs. Government policies: New licenses and regulations can make entry challenging. FinTech and mobile banking pose potential competitive threats but also create opportunities for collaboration.

2. Bargaining Power of Suppliers (High): The suppliers here represent the surplus fund providers i.e., individual households and depositors. As this is a very highly regulated industry, the government catalyzes this high bargaining power of suppliers.

3. Bargaining Power of Buyers (High): Individuals, SMEs, corporations, and government entities present varied needs and bargaining power. Customers are highly price-sensitive, especially for basic services. Customers are becoming more aware of options and can switch between providers. Mobile wallets and microfinance institutions offer alternatives.

4. Threat of Substitutes (Moderate): Peer-to-peer lending platforms are emerging as alternatives for specific needs. Technology companies have started offering financial services like payments and digital wallets.

5. Competitive Rivalry (High): Numerous players across banking, NBFI, and MFIs, with varying competitive intensity in different segments. Overcrowding ignites Intense competition in retail banking and microfinance. Competition leads to lower prices and innovative offerings. Mergers and acquisitions are increasing, potentially reducing competition.

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Future Outlook

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Future technical developments and government initiatives have the potential to greatly increase financial inclusion and attract more people into the formal financial system. Fintech solutions like online payments, e-wallets, and mobile banking are becoming more and more popular, which is predicted to promote financial efficiency and innovation even more. Bangladesh is a global leader in Islamic finance, and demand from both domestic and foreign markets is expected to drive the industry's continued expansion. Small and medium-sized businesses' (SMEs') access to financing is becoming more widely acknowledged as being essential to economic growth, which has led to the launch of new goods and services catered to this important market. Effectively controlling inflation, however, remains a constant challenge that could have an impact on interest rates, currency rates, and the stability of the financial system as a whole. Sturdy cybersecurity measures are essential to prevent financial fraud and data breaches as the reliance on digital platforms increases. Last but not least, preserving a sound and competitive financial climate requires walking the tightrope between encouraging innovation and guaranteeing responsible regulation.

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Sub-Industry

NBFI

Discover the untapped potential of Bangladesh's NBFI sector! Delve into its transformative journey, uncovering its influence in the financial domain.

Fintech

Gain insights into the evolution of Bangladesh's fintech landscape, exploring its role in tackling issues like Hundi. Despite notable advancements, what are the challenges hindering further expansion? What are the challenges hindering further expansion?

Banks

At the forefront of economic projects, banks facilitate thousands of money transfers. Despite stringent regulation, they encounter challenges. What proactive measures are being taken to address them?