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Management of Financial Institutions (MFI)

Introduction to Business of Financial Institutions Financial System of Bangladesh. Management of Financial Institutions (MFI). Course Teacher: Md. Nurul Hoque , Deputy Gen. Manager Sonali Bank Limited & Part Time Teacher : Stamford University Bangladesh

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Management of Financial Institutions (MFI)

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  1. Introduction to Business of Financial Institutions Financial System of Bangladesh Management of Financial Institutions (MFI) Course Teacher: Md. Nurul Hoque, Deputy Gen. Manager Sonali Bank Limited & Part Time Teacher: Stamford University Bangladesh Institute of Bankers Bangladesh( IBB) & Evening MBA, DU.

  2. Financial System in Bangladesh: • It is a set of institutional arrangement through which financial surplus in the economy are mobilized from surplus units and transferred to deficit units. • What are the constituents of Financial System? • Financial In our financial system there are four constituents, they are as follows: • Financial Institution • Financial Instruments • Financial Market Management of Financial Institutions (MFI)

  3. 1. Financial Institution: • In modern concept financial institution means financial intermediary (FI). It mediates or stands between ultimate borrowers and ultimate lenders. • Financial institution are generally classified under three main heads: • Bangladesh Bank (Central Bank) • Banks & • Non-bank Financial Institutes • Bangladesh Bank is the central Bank of the country. It is also Banker’s Bank in the financial market. • All commercial bank and specialized banks are clubbed under banking financial institution (BFI’s). The investment/merchant banks, leasing companies, house financial companies etc. are included under non-banking financial institution (NBFI’s). Management of Financial Institutions (MFI)

  4. Banks / Banking Financial Institution : After the independence, banking industry in Bangladesh started. Its journey with 6 nationalized commercial banks, 2 state owned specialized banks and 3 foreign banks. In the 1980’s banking industry in Bangladesh achieved significant expansion with the entrance of private banks. Now banks in Bangladesh are primarily of two types: Scheduled banks: The banks, which get licensed to operate under Banking company Act 1991 (Amended up to 2013) are termed as Scheduled Bank. There are 57 scheduled banks who opened under control and supervision of Bangladesh bank which are empowered to do so through Bangladesh Bank order 1972 and Bank Company Act 1991. Scheduled banks are classified into following types. Management of Financial Institutions (MFI)

  5. Management of Financial Institutions (MFI) State Owned Commercial Bank (SOCB) There are 6 SOCB’s which are fully or majority owned by the Government of Bangladesh. After 1973, 2 Banks out of 6 SOCB converted to private bank. 1. Pubali Bank Limited and 2. Uttara Bank Limited. Now SOCB’s stands in four: 1.Sonali Bank Limited, 2. Janata Bank Limited, 3. Agrani Bank Limited, 4. Rupali Bank Limited. Specialized Bank (SDB’s) 3 Specialized bank are now operating which were established for specific objectives like agricultural or industrial development. These banks are fully or majority owned by the Government of Bangladesh. These are 1. BDBL, 2. Bangladesh Krishi Bank, 3. RajshahiKrishiUnnayan Bank.

  6. Management of Financial Institutions (MFI) Private Commercial Bank (PCB) There are 40 private commercial banks which are majorly owned by the private entities. PCB’s can be Categorized into two groups: Conventional PCB’s: 32 Conventional PCB’s are now operating in the industry. They perform the banking functions in conventional fashion i.e. interest based operations. Islami Shariah based PCB’s: There are 8 Islami Shariah based PCB’s in Bangladesh and they execute banking activities according to Islami Shariah based principals i.e. profit-loss sharing (PLS) mode. Foreign Commercial Bank’s (FCB’s): 9 FCB’s are operating Bangladesh as in the branches of the banks which are incorporated in abroad. 1. City Bank N.A. 2. HSBC 3. Standard Chartered 4. Commercial bank of Ceylon 5. State bank of India 6. Habib Bank 7. National Bank of Pakistan 8. Bank Al-Falah.

  7. Non Scheduled banks: The banks, which are established for special and definite objective and opened under the Acts that are contacted for meeting up those objective are termed as nonscheduled banks. These Banks cannot performed all function of scheduled banks. There are 6 non-scheduled bank in Bangladesh which are- Ansar VDP Unnayan Bank, Karmashangosthan Bank, Grameen Bank, Somobay Bank (Co-operative bank), ProbashiKollyan Bank, PalliSanchay Bank. Management of Financial Institutions (MFI)

  8. Non-banking Financial Institution : • Non Bank Financial Institutions (FI’s) are those of financial institutions which are regulated under Financial Institution ACT, 1993 and under controlled by Bangladesh Bank. Now 33 FIs are operating in Bangladesh . • Out of the total,3 is fully government owned, rest was initiated by private domestic initiative and by joint venture initiative. Major Sources of funds of NBFIs are term deposit, credit facility from banks and other FIs, call money as well as bond and securitization. Main NBFIs are- • Invest Corporation of Bangladesh (ICB) • Bangladesh House Building Finance Corporation (BHBFC) • Bank of Small Industry & Commerce (BSIC) • Industrial Development Leasing Company of Bangladesh (IDLC) • Saudia-Bangladesh Industrial and agriculture Investment Company Limited (SABINCO) • Industrial Promotion and Development Company Bangladesh (IPDCB) • United Leasing Company ( ULC) Management of Financial Institutions (MFI)

  9. Non-banking Financial Institution : • Non Bank Financial Institutions (FI’s) are those of financial institutions which are regulated under Financial Institution ACT, 1993 and under controlled by Bangladesh Bank. Now 33 FIs are operating in Bangladesh . • Out of the total,3 is fully government owned, rest was initiated by private domestic initiative and by joint venture initiative. Major Sources of funds of NBFIs are term deposit, credit facility from banks and other FIs, call money as well as bond and securitization. Main NBFIs are- • Invest Corporation of Bangladesh (ICB) • Bangladesh House Building Finance Corporation (BHBFC) • Bank of Small Industry & Commerce (BSIC) • Industrial Development Leasing Company of Bangladesh (IDLC) • Saudia-Bangladesh Industrial and agriculture Investment Company Limited (SABINCO) • Industrial Promotion and Development Company Bangladesh (IPDCB) • United Leasing Company ( ULC) Management of Financial Institutions (MFI)

  10. Insurance Companies: • General Insurance Company (Public & Private) • Life Insurance Company (Public & Private) • Marine insurance. Management of Financial Institutions (MFI)

  11. Different Types of Banking System: Management of Financial Institutions (MFI)

  12. Different Types of Banking System: Management of Financial Institutions (MFI)

  13. Major Deferences between Banks and NBFIs are as follows: • Cannot issue cheques, pay orders or demand note • NBFIs cannot received demand deposit • NBFIs cannot involved in foreign exchange financing. • NBFIs Do not form part of the payment and settlement system. • NBFIs incorporated under Company Act but Banks under the Banking company Act . • NBFIs can accept public for minimum 12 months maximum 60 months • Deposit in NBFIs are not insured • Repayment of deposit not guaranteed by regulation body / Institution • Higher interest rate compare to Bank • Bank trend to target corporate as well as retailers but NBFIs are more geared towards the retails sector. Example Vehicle Financing, Consumer Financing. • Bank Can issue Credit Card, but NBFIs cannot. Management of Financial Institutions (MFI)

  14. Problems of Financial Institutions (BFIs & NBFIs) • Political Instability • Lack of awareness • Lack of Investment climate • Lack of investment company and merchant banks • Lack of information about loans • Failure to produce collateral • Legal problem to realize loan • Complex and time consuming procedure to sanction loans • Government interference • Lack of supervision • Default Culture • Rate of interest • Failure to reach the loan to the needy • Problem of determining priority • Problems of determining the amount of Credit. Management of Financial Institutions (MFI)

  15. Problem prevailing in the banking system: • Deposit related problem- • Lower equity capital.(10-20 crore) • Deposit high • Depending on depositors fund • Risk of depositors fund • Possibility of liquidation • Loan & advance related – • Lack of investable fund • Insufficient fields of loan & advance • Increase of non- performing loan • Weak capital market • Low opportunity to investment to share & deb • Centralization of financing in urban area • Lack of training & IT technical persons • Liquidity problem • Loan defaulter culture • High rate of interest • Corruption & nepotism • Legal constraints Management of Financial Institutions (MFI)

  16. Solution of the problems: • Use of modern arts & technology • Removing legal constraints • Creative competitive environment • Upgrading the supervision of Bangladesh Bank • Development of business environment • Increasing training facility • Increasing equity capital • Preferring honest & efficient persons • Development of methodology • Ensuring accountability • Ensuring early alertness for loan recovery Management of Financial Institutions (MFI)

  17. Key matters for the chapter: • BFIs & NBFIs • Financial intermediary & Investment company • CAMELS & camel rating • Commercial bank & central bank • Concept of mobile banking • Sources & uses of fund of BFIs & NBFIs • Rate sensitive assets & rate sensitive liability • Borrowing from money market at high interest rate • Problem & prospects of interest rate liberalization • Control of money supply & credit by BB • Role of BB ,BFIs, NBFIs & specialized financial institution • Recovery of loan, classification, rescheduling & role of BB Management of Financial Institutions (MFI)

  18. Key matters for the chapter: • Calculation of ROE, ROA, NIM, Net non- interest margin, EPS ,NOM • Cost of fund & EFFECT OF BRING DOWN THE INTEREST rate of loan in single digit keeping the cost of fund unchanged. • Credit –deposit ratio & its effect in case of abnormality in the overall performance of FI. • Reasons of non- recovery of mortgage loan & recovery techniques. • Creation of charge on security. • Banks right of set off & lien. • Collecting of CIB report for credit management. • Reasons of big financial crimes in recent banking industry. • SME financing & role of SME in economic development. • Financial statement analysis & its important. Management of Financial Institutions (MFI)

  19. Know About the Following: • KYC, TP • BAMLCO • BCU • BFIU • STR & CTR • CDD, EDD, • Beneficial Owner, • Shell Bank • TBML • FATF RECOMMENDATION • Independent Testing • Self Assessment Report • Early Warning System • Offshore Banking • Correspondent BANKING Management of Financial Institutions (MFI)

  20. Know About the Following: • BATCH • APG • DEBT-EQUITY Ratio • Burden • ROA, ROE • EPS • NII, NOM, NIM • MCR • RWA • Core Capital • Minimum Capital • Duration Gap • Stage of Money Laundering • Marine Insurance • Option • Future • forward contract Management of Financial Institutions (MFI)

  21. Management of Financial Institutions (MFI) Any Question?

  22. Management of Financial Institutions (MFI) Thank you!

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